Question

Suppose that bikes sell in world markets for $400, and they are made from factors of production worth $300. suppose that a country puts a 25% tariff on imported bike

1. The amount of tariff this country charge is: a)$75 b)$100 c)$300 d)$400

2. With a 25% tariff on imported bikes, domestic bike assembly firms can now charge up to: a)$100 b)$300 c)$400 d)$500

3. The effective rate of protection for domestic bike assembly firms is: a)25% b)50% c)75% d)100%

4. In this case, the effective rate of protection is ___ the tariff rate.

a)greater than b)equal c)less than d)not more than

Answer 1

1. Tariff is imposed on the initial selling price, before tariff. Selling price before tariff here is $400. Therefore, tariff = 25% of 400 = $100

Hence, correct option is b.

2.  The domestic bike assembly can charge up to the selling price of imported goods in the country plus the tariff imposed, i.e. $400 + $100 = $500. Hence, option d is correct option.

3. Effective rate of protection = [(500 - 400)/400]*100 = 25%. Hence, correct option is a

4. Effective rate of protection is equal to tariff = 25%. Hence, correct option is b.