Question

Context

In this week's discussion, you 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 U.S. tariffs on Chinese imports are having on profits.

Conceptually, you will be asked to address elasticity as a measurement of the magnitude of a change. Additionally, you will be asked to examine how price elasticity of demand plays a role in consumer demand and how profits are affected by a tariff.

Instructions

For this discussion, please make yourself CEO of only one of these hypothetical companies.

1. '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, and outdoor yard decorations—all of which have to be ready to ship by early fall. In fact, we at 'Tis the Season have a highly inelastic supply curve, ramping up to produce decorations for each season, and then once that season has been shipped, we move on to the next season. Fortunately, the price elasticity of demand for almost all of our products is 0.19.
2. We Build Big—We Build Big is one of the largest developers of new residential structure in the U.S. We Build Big builds everything from apartment complexes to new single-family homes. Critical materials such as lumber, gypsum board, and fabricate metal are largely imported. At We Build Big, we know that our production process, the supply curve, is relatively inelastic. The concern over profits is that the price elasticity of demand for housing is 1.0.
3. Very Big US Auto—Very Big US Auto is one of the oldest and largest auto manufacturers in the U.S. Very Big US Auto's supply chain is highly dependent on components manufactured in China and assembled in the U.S. Very Big US Auto knows that the price elasticity of supply is relatively inelastic and that demand is relatively elastic, with a price elasticity of demand of 1.2.

In your discussion post, address the following prompts within the context of your chosen hypothetical company of which you are the CEO:

• Is the demand curve for your product relatively elastic, inelastic, or unitary elastic? Demonstrate this 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. In other words, show your calculation of the percentage change in the quantity demanded given a 25% change in the price.
• Given your company's price elasticity of supply and price elasticity of demand, prepare a statement for your board of directors as to the potential impact of profits. Who will pay the larger share of the tariff: your firm or your customers?

Note: In your discussion posts for this course, do not rely on Wikipedia, Investopedia, or any similar website as a reference or supporting source.

Answer 1

We have to be the CEO of one hypothetical company , so let it be VERY BIG AUTO US- Very Big US Auto is one of the oldest and largest auto manufacturers in the U.S. Very Big US Auto's supply chain is highly dependent on components manufactured in China and assembled in the U.S.

It is given that the price elasticity of supply is relatively inelastic and price elasticity of demand is 1.2 which is RELATIVELY ELASTIC (Elasticity>1).

If there is a 25% increases in price due to tariffs, we can check by how much the quantity demanded would fall by using formula:-

PRICE ELASTICITY OF DEMAND=

1.2=

percentage fall in quantity demanded= 1.2*25= 30% fall in quantity demanded.

from the above information we can say that:

• Price elasticity of supply already being inelastic and demand being elastic is a problem for the firm as the consumers can move from one seller to another to buy the product because the demand is elastic .
• the newly imposed tariff will further lower the profits aby a large amount as with a 25% hike in price the quantity demanded will fall by 30% which is a huge drop.
• With the buyers being in power in this situation with elastic demand of the product and sellers facing inelastic supply means that the burden of tariff will fall more on the suppliers and less on the buyers as they can shift on the substitutes easily.