Context:

This week you will provide a discussion about being the CEO of a company.In anticipation of the upcoming quarterly disclosure of profits,you prepare the Board of Directors for the pressure that cost-push inflation is having on profits. There will be some erosion of profits.Pleasemake yourself CEO of only one of these hypothetical companies.

Profile of the Companies

All America Grocery Inc- We serve communities in the middle of the income market providing low prices for all basic grocery needs.Our modest income consumers expect goods deals on good quality foods.TheCovid-19 pandemic has putupward pressure on the price of everything we sell. We are also experience rising costs in every aspect of our operation as we have to put extra resources into protecting both our employees and the public.We are both fortunate and unfortunate that the price elasticity of demand for food is .20.

Very Big US Auto-Very Big US Auto is one of the oldest and one of the largest manufacturers of autos in the US.Very Big US Auto's supply chain is highly dependent on components manufactured in China and assembled in the US, (think back to our week 1 problem with the seat manufacturer).The Chinese economy has rebounded quickly, much of the production capacity is still going torebuild inventories, so the supply of components still lags behind demand so there is upward pressure on all of our costs.Additionally, manufacturing facilities like ours must take extra precautions to keep workers safe.Costs are rising in all aspects of production across the industry.On the demand side, Very Big US Auto knows thatdemand is relatively elastic with a priceelasticity of demand of1.2. But we also know that pandemic has made some transportation substitutes less acceptable.

Big Time Entertainment- Big Time Entertainment is a nationwide firm providing movies, arcades, and other in-person entertainmentvenues such as bowling and roller skating.Our operations have been heavily impacted during theCovid-19 pandemic.Onreopening, we have been faced with a host of regulations that havegreatly increased our cost of operations. We also face uncertainty as to the potential for additional shutdowns. Customers are fearful plus theguidance onoperating our facilities means we are operating far below our optimal number of patrons to cover the higher cost for cleaning and other measures to protect the public and our employees.The price elasticity of demand is 1.6 and we are also faced with more competitors,onlineentertainment and gaming, that are not experiencing these cost pressures.

Now explain:

• Is the demand curve for your product relatively elastic,inelastic, or unitary elastic?Demonstrate for your company's product,by how much the quantity demanded will change if you pass on a 10%increase in cost.In other words,show your calculation of the percentage change in the quantitydemanded if your prices are raised by 10%.You must provide a calculation showing the percentage change in quantity demanded.
• Given your company's price elasticity of demand and the industry supply/competitive environment you face, prepare a statement for your board as to the potential impact on profits.Who will pay the larger share of the cost increases,your firm or your customers?