Reference no: EM133077197
You are going to be the CEO of a company. In anticipation of the upcoming quarterly disclosure of profits, you equipyour board of directors for the challenge that U.S. tariffs on Chinese imports are having on profits.
Instructions
Please make yourself the CEO of only one of the following 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, 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.
-We Build Big-We Build Big is one of the largest developers of a new residential structure in the United States. 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.
-Very Big US Auto-Very Big US Auto is one of the oldest and largest auto manufacturers in the United States. Very Big US Auto's supply chain is highly dependent on components manufactured in China and assembled in the United States. 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. 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, provide 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?
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