The Price Elasticity of Demand and Tariffs

In this week’s discussion your are going to be the CEO of a company.  You will have to explain to your Board of Director how proposed tariffs will likely effect your profits. First, select one company.

Fresh Foods on the Move – Fresh Foods on the Move imports fruits and vegetables from Mexico for sale to large manufacturers who process those products which are largely sold in grocery stores in the US. The price elasticity of demand for food in a wealthy nation like the US is approximately 0.15.

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 both Canada and Mexico.  The price elasticity of demand for housing is 1.0.

Any US Auto Maker – Any US Auto Maker motor company is one of the oldest and one of the largest auto manufacturers in the US.  The Any US Auto Maker supply chain crosses both the Canadian and the Mexican boarder and parts of every car assembled in the US may cross the boarder and pay a tariff multiple times.  The price elasticity for automobiles is 1.2.

Now explain:

• Is the demand curve relatively elastic, inelastic or unitary elastic.  For every 10% increase in the price of the good you sell, how much does the quantity demanded decrease?
• Given the degree of elasticity your company faces would you recommend to the Board that you pass on to the consumer: none of the cost increases from the tariff; some of th cost increase from the tariff; all of cost increases from the tariff?
• Why is this strategy profit maximizing under the circumstances?