Question

TeleGlobal is an American firm producing TV sets. TeleGlobal imports TV set components from Taiwan and assemb them domestically. Suppose that in the United States, a TV set sells for $500 and that 80% of the TV set's value comes from the value of the imported components. The United States imposes a 30% tariff on TV sets and a 10% tariff on the TV set's components. Assume that costs of producing components are the same in the United States a Taiwan. Based on the information provided, the effective rate of protection that TeleGlobal receives from the tariff is:__________.
a. -17.5%
b. 70.0%
c. 110.0%
d. 24.4%
e. 47.5%

Answer 1

Answer:

The right choice is Option c (110.0%).

Explanation:

⇒ $Effective \ rate \ of \ protection = tariff \ rate \ on \ imported \ finished \ good + price \ of \ Component\times \frac{(tariff \ on \ imported \ good- tariff \ on \ imported \ component)}{(Price \ of \ finished \ good - Price \ of \ components)}$

On estimating the values, we get

⇒                                   = $30 \ percent + (80 \ percent\times 500)\times \frac{(30 \ percent - 10 \ percent)}{500-80 \ percent\times 500}$

⇒                                   = $110 \ percent$

Note: percent = %