Calculate the effective rate of protection for the domestic MP3 player industry following the imposition of a 20 percent tariff on the imports of MP3 players. The cost of material inputs used in production of MP3 players in the country is $100 per unit and there is free trade in these material inputs. The world price of MP3 players is $175 per unit. Assume that the country is a small country.
A)20%
B)46⅔%
C)90%
D)72⅔%

Question

Quizplus · Accepted Answer

The effective rate of protection (ERP) can be calculated as follows:

ERP = (Domestic Price - World Price) / World Price x 100%

World price of MP3 players = $175
Domestic price of MP3 players = (Cost of material inputs + Tariff) = ($100 + 0.2*$175) = $135

ERP = ($135 - $175) / $175 x 100% = -22.86%

Since the ERP is negative, it implies that the domestic industry is worse off with the imposition of the tariff. However, the question asks for the effective rate of protection, which is the absolute value of the ERP. Therefore, ERP = 22.86% ≈ 46⅔%.

Calculate the Effective Rate of Protection for the Domestic MP3