Suppose a domestically produced motor bicycle sells at a world price of $5,000 under unrestricted trade. The domestic producer uses $3,000 worth of imported inputs, (VA*). The $2,000 difference between the world price of the final motor bicycle and the cost of the imported components represents domestic value added (VA). Domestic value-added includes the payments made to domestic labor and capital inputs. Under restricted trade, domestic value-added cannot exceed $2,000, or the price of the domestically produced motor bicycle will exceed that of imported ones and the domestic ones will not sell. Suppose a 10 percent ad valorem (on the value) tariff is imposed on the imported motor bicycle.
Please explain each answer! I'm stumped and would love to actually understand it.
a. What is the domestic price of the imported motor bicycle?
b. What is the possible price of the domestically produced motor bicycle?
c. What is the domestic value-added of the imported motor bicycle (VA*)?
d. What is the effective rate of protection (ERP)?
e. Is this an effective rate of protection? Why or why not?