This problem concerns the effective rate of protection. With free trade, each dollar of value added in the domestic cloth-making industry is divided as follows:
40 cents value added,
30 cents for cotton yarn, and
30 cents for other fibers.
Suppose that a 25 percent ad valorem tariff is placed on cloth imports and a l/6 tariff (16.7 percent) goes on cotton yarn imports. (There is no tariff on imports of other fibers.) Work out the division of the tariff-ridden unit value of $1.25 (the free-trade unit cloth value of $1 plus the cloth tariff) into value added, payments for cotton, and payments for other fibers.
Then calculate the effective rate of protection.