Chile is an importer of computer chips,taking the world price of $12 per chip as given.Suppose Chile imposes a $7 tariff on chips.Which of the following outcomes is possible?
A)The price of chips in Chile increases to $19;the quantity of Chilean-produced chips decreases;and the quantity of chips imported by Chile decreases.
B)The price of chips in Chile increases to $16;the quantity of Chilean-produced chips increases;and the quantity of chips imported by Chile decreases.
C)The price of chips in Chile increases to $19;the quantity of Chilean-produced chips increases;and the quantity of chips imported by Chile decreases.
D)The price of chips in Chile increases to $16;the quantity of Chilean-produced chips increases;and the quantity of chips imported by Chile does not change.

Question

Quizplus · Accepted Answer

When Chile imposes a $7 tariff on chips, the price of chips in Chile increases from $12 to $19 ($12 + $7). As a result, domestic producers in Chile have an incentive to increase production, leading to an increase in the quantity of Chilean-produced chips. At the same time, the higher price of chips in Chile makes imported chips relatively more expensive, resulting in a decrease in the quantity of chips imported by Chile. Therefore, the outcome of choice C is possible.

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