ECO 550 Strayer University Challenges of US Tariffs on China Imports Discussion

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The Tariff, the Price Elasticity of Demand and the Impact on Company Profits

Here is some help with elasticity.

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. In fact  we at ‘Tis the Season has a highly inelastic supply curve, they ramp up  to produce decorations for each season and then once that season has  been shipped they move on to the next season.  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. We  Build Big 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.

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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