Question

The price elasticity of demand for imported whiskey is estimated to be −0.70 over a wide
interval of prices. The federal government decides to raise the import tariff on foreign
whiskey, causing its price to rise by 20 percent.
a. Will the quantity demanded on imported whiskey rise or fall, and by what percentage
amount?
b. What is the percentage change in the total revenue of imported whisky after the tariff
increases?
c. What will be the impact on domestic whisky demand after the tariff increases?

Please show work.

Answer 1

Price elasticity of demand is given by PED = %∆Qd / %∆P

a) we are given then the price elasticity of demand is -0.7. price is increased by 20%. Therefore quantity demanded on imported whisky will change by -0.7*20 = -14%. Thus, quantity demanded declines by 14%

b) note that %∆ revenue = %∆P + %∆Qd

%∆Revenue = + 20% - 14% = +6%

This shows that total revenue will increased by 6%

c) when the tariff is increased domestic price will increase which indicates that tariff will reduce the quantity demanded in domestic market.