Question

The price elasticity of demand for imported whiskey is estimated to be −0.20 over a wide interval of prices. The federal government decides to raise the import tariff on foreign whiskey, causing its price to rise by 30 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 after the tariff increases?

Answer 1

A) Price Ed = % change in quantity demanded / % change in price

- 0.20 = % change in quantity demanded/30

% change in quantity demanded = - 0.20 x 30 = - 6

So, quantity demanded on imported whiskey fall by 6%.

B) Let price = 50 and quantity demanded = 10

After tariff Price = 50 + 30% of 50 = 65 and Quantity = 10 - 6% of 10 = 10 - 0.6 = 9.4

Initial TR = 50 x 10 = 500

New TR = 65 x 9.4 = 611

% change in TR = (611 - 500)/500 x 100 = 111/5 = 22.2%

TR increases by 22.2%.