Question 1: Effective Rate of Protection
Assume that country Pacifico is an open economy and the world price of cars is $10. The domestic demand for cars in Pacifico is Q=90-P, and the domestic supply curve of cars in Pacifico is Q=2P. Assume that the government of Pacifico would like to increase the production of cars by domestic producers. In order to support this goal, the government of Pacifico imposes an import tariff of $10/car for imported cars.
- What is the market equilibrium for cars in Pacifico before the government impose the import tariff? (How many cars were demanded by Pacifico residents, how many cars were supplied by domestic producers, how many cars were imported?)
- What is the effect of the import tariff?