Sweetland is a small country that imports cars from the world market at a price of $25,000. The country has an auto parts manufacturing industry that can meet the demand for auto parts by domestic car manufacturers. (The domestic cars are perfect substitutes for imported cars). Each car production requires auto parts worth $20,000. The government of Sweetland imposes a 25% tariff on imported cars so that domestic car manufacturers can now charge up to $31,250 for a car. 1. Define in words the effective rate of protection. What is the effective rate of protection for domestic car manufacturers? 2. Now suppose that to encourage domestic auto parts industry, government imposes a 25% tariff on auto parts, but no tariff on imported cars. 1. What is the effective rate of protection for domestic car manufacturers? 2. What is the nominal rate of protection for the domestic auto parts industry?
Sweetland is a small country that imports cars from the world market at a price of $25,000. The country has an auto parts manufacturing industry that can meet the demand for auto parts by domestic car manufacturers. (The domestic cars are perfect substitutes for imported cars). Each car production requires auto parts worth $20,000. The government of Sweetland imposes a 25% tariff on imported cars so that domestic car manufacturers can now charge up to $31,250 for a car. 1. Define in words the effective rate of protection. What is the effective rate of protection for domestic car manufacturers? 2. Now suppose that to encourage domestic auto parts industry, government imposes a 25% tariff on auto parts, but no tariff on imported cars. 1. What is the effective rate of protection for domestic car manufacturers? 2. What is the nominal rate of protection for the domestic auto parts industry?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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