Denmark is an importer of computer chips,taking the world price of $12 per chip as given.Suppose Denmark imposes a $5 tariff on chips.Which of the following outcomes is possible?

Question

Quizplus · Accepted Answer

When Denmark imposes a $5 tariff on chips, the new price of chips in Denmark will be $17 ($12 + $5). As a result of the tariff, the quantity of chips imported by Denmark decreases because the new higher price makes it less attractive for Danish buyers. However, the quantity of Danish-produced chips is likely to increase because the tariff makes it easier for domestic producers to compete with foreign suppliers. This means that the outcome of A (price of chips in Denmark increases to $19) is too extreme, as it suggests that the tariff has had a much larger effect on the market than is likely. The outcome of C (quantity of chips imported by Denmark increases) is also unlikely, since the purpose of a tariff is specifically to reduce imports. Finally, the outcome of D (price of chips in Denmark increases to $15) is possible, but it is not the most likely, given that the tariff is $5 and would likely have a bigger effect on the market. Therefore, the best choice is B.

Denmark Is an Importer of Computer Chips,taking the World Price