At free-trade prices, a bicycle in country X sells for $100 when the per-unit cost of material inputs is $90. Country X has a nominal tariff rate of 15% on bicycles, and 10% on the material inputs. Based on this information, calculate the effective rate of protection for the bicycle industry in country X. Assume that country X is a small country.
A)80%
B)60%
C)5%
D)15%

Question

Quizplus · Accepted Answer

To calculate the effective rate of protection, we need to compare the price of a bicycle in country X with and without tariffs, and then compare it to the per-unit cost of material inputs.

Without tariffs:
Price of bicycle = $100
Cost of material inputs = $90

With tariffs:
Price of bicycle = $100 + 15% of $100 = $115
Cost of material inputs = $90 + 10% of $90 = $99

Effective rate of protection = (Price of bicycle with tariffs - Price of bicycle without tariffs) / Cost of material inputs

Effective rate of protection = ($115 - $100) / $99 = 15.15%

Therefore, the effective rate of protection for the bicycle industry in country X is 15.15%, which is closest to option B (60%).

At Free-Trade Prices, a Bicycle in Country X Sells for $100