The price elasticity of demand for imported whiskey is estimated to be -.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. Will sales of whiskey rise or fall, and by what percentage amount?
percent increase in demand/percent increase in price = -.2
price increases by 20%
demand increases by -.2*20 = -4%
In other words demand decreases by 4%
To determine the impact of a price increase on the sales of imported whiskey, we need to use the concept of price elasticity of demand. The price elasticity of demand measures how sensitive the quantity demanded of a product is to changes in its price.
In this case, the price elasticity of demand for imported whiskey is given as -0.20. To interpret this, we need to consider the negative sign. A negative price elasticity of demand indicates that demand is inelastic, meaning that a change in price does not significantly impact the quantity demanded.
Now, let's look at the scenario where the federal government raises the import tariff on foreign whiskey, causing its price to rise by 20 percent. To determine the impact on sales, we need to calculate the percentage change in quantity demanded given the percentage change in price.
According to the information provided, the percentage change in price is +20%. Since the price elasticity of demand is -0.20, we can use the formula for percentage change in quantity demanded:
Percentage change in quantity demanded = Price elasticity of demand * Percentage change in price
Now, let's plug in the values:
Percentage change in quantity demanded = -0.20 * 20%
Percentage change in quantity demanded = -0.04
Here, we find that the percentage change in quantity demanded is -0.04, which indicates a decrease in sales. By -0.04, we mean that sales would decrease by 4%.
Therefore, based on the given price elasticity of demand and the 20% increase in price, the sales of imported whiskey will likely fall by 4%.