economincs

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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 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 after the tariffincreases?

  • economincs -

    Sales of whiskey will fall by 4%. Finding the solution to this problem is simple algebra. The equation for the price elasticity of demand is Elasticity=%Change Quantity Demanded / %Change Price
    Therefore, we just plug in the figures we are given and solve for % Change Quantity Demanded
    -.2 = X / .2
    Multiple -.2 by .2 and we get -.04 which is 4% which is the % Change in Quantity Demanded

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