This is a two part question. These questions refer to the industry that makes wi
ID: 1126335 • Letter: T
Question
This is a two part question. These questions refer to the industry that makes winter coats. At free-trade prices, a small country can sell the coats it makes for $100 each. Making each coat requires $50 net worth of duck feathers and $10 worth of cloth. Please show work.
A. If a 10% tariff is placed on duck feathers (but no tariff is placed on coats or cloth) then the effective rate of protection for the jacket industry will be ________ percent.
B. A rowboat sells for $1000. It is made from $600 of wood and $100 of glue. Then a 20% tariff is placed on rowboats, a 10% tariff is placed on glue, and a 30% tariff is placed on wood. Then the effective protection of rowboats is _______ percent.
Explanation / Answer
A) Effective rate of protection = (Value Aadded with tariff - Value Added free trade ) / Value added with free trade
Value added with tariff = 100 -55- 10 ( tariff is included in feather only)
=100 - 65
= 35
Value added with free trade = 100 - 50-10
= 40
Effective protection rate = 35/40 -40/40
= .875-1
0.125
or 12.5 %
B)
Effective rate of protection = (Value Aadded with tariff - Value Added free trade ) / Value added with free trade
Value added with tariff = 1200 -780- 110 ( new figure after adding tariffs to all items)
=1200 - 890
= 310
Value added with free trade = 1000 - 600-100
= 300
Effective protection rate = 300/310 -310/310
= .967-1
0.032
or 3.2 %
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