The Tariff, the Price Elasticity of Demand and the Impact on Company Profits 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. 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. Very Big US Auto knows that the price elasticity of supply is relatively inelastic and that then the price elasticity of demand which is1.2.
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. 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 damand prepare a statement for your board as to the potential impact of profits. Who will pay the the larger share of the tariff, your firm or your customers.
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