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 is 1.2.
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 demand 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.