Question

The Tariff, the Price Elasticity of Demand and the Impact on Company ProfitsHere is some help with elasticity.  

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In this week's discussion your are going to be the CEO of a company.  In anticipation of the upcoming quarterly disclosure of profits, you prepare your Board of Directors for the challenge that US Tariffs on Chinese Imports is having on profits. Please make yourself CEO of only one of these hypothetical companies.

'Tis the Season- 'Tis the season is one of the largest importers of holiday decorations and the summer quarter is devoted to importing decorations such as lighting, artificial trees, table runners, outdoor yard decorations all of which have to be ready to ship by early fall. Fortunately the price elasticity of demand for almost all of your products is 0.19.

We Build Big - We Build Big is one of the largest developers of residential structure in the US.  We Build Big, builds every thing from apartment complexes to new single family homes.  Critical materials such as lumber, gypsum board, fabricate metal etc are largely imported. The price elasticity of demand for housing is 1.0.

Very Big US Auto - Very Big US Auto is one of the oldest and one of the largest auto manufacturers of auto in the US.  Very Big US Auto's supply chain is highly dependent components manufactured in China and assembled in the US.  The price elasticity for automobiles is 1.2.

Now explain:

  • Is the demand curve for your product relatively elastic, inelastic or unitary elastic?  Demonstrate for your company's product, by how much the quantity demanded will change if you pass on the 25% increase in cost from the tariff as a price increase for your product. 
  • Given the degree of elasticity your company faces and based on the percentage change in quantity demanded from passing on the full price of the tariff make a recommendation to the Board that you pass on to the consumer: none of the cost increases from the tariff, only some portion of the tariff, or all of the tariff? 
  • If you pass on only some of the increased cost, which of you will pay the largest amount of the tariff: your company in the form of a lower profit margin or the consumer in the form of higher prices?

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