Suppose that the production of $500,000 worth of steel in the United States requires $100,000 worth of iron ore.The U.S.nominal tariff rates for importing these goods are 15 percent for steel and 5 percent for iron ore.Given this information,the effective rate of protection for the U.S.steel industry is approximately:
A) 6 percent
B) 12 percent
C) 18 percent
D) 24 percent

Question

Quizplus · Accepted Answer

To calculate the effective rate of protection, we need to consider both the tariff on the imported goods (steel and iron ore) and the value added by domestic production.

First, let's calculate the tariff-inclusive cost of imports for both steel and iron ore:

- Steel: $500,000 + ($500,000 x 0.15) = $575,000 
- Iron ore: $100,000 + ($100,000 x 0.05) = $105,000

Next, we need to compare the domestic cost of production to the tariff-inclusive cost of imports for steel:

- Domestic cost: $500,000 + $100,000 = $600,000 
- Tariff-inclusive cost of imports: $575,000

The effective rate of protection can be calculated as:

(1 - [tariff-inclusive cost of imports / domestic cost]) x 100%

Plugging in the values:

(1 - [$575,000 / $600,000]) x 100% = 4.17%

Therefore, the effective rate of protection for the U.S. steel industry is approximately 18% (15% tariff on steel imports, plus an additional 4.17% due to the value added by domestic production).

The correct answer is C.

Suppose That the Production of $500,000 Worth of Steel in the United