Table 4.1.Production Costs and Prices of Imported and Domestic VCRs

-Consider Table 4.1.After the tariff,domestic value added equals:
A) $25
B) $50
C) $75
D) $100

Question

Table 4.1.Production Costs and Prices of Imported and Domestic VCRs
 
-Consider Table 4.1.After the tariff,domestic value added equals:
A) $25 
B) $50 
C) $75 
D) $100

Quizplus · Accepted Answer

Domestic value added refers to the value added to a product during its production process in the domestic country. In the case of domestic VCRs, the production cost is $125 (sum of $50 labor cost and $75 material cost) and the production price is $150. Therefore, domestic value added is $25 ($150-$125). After the tariff, the production price of imported VCRs increases from $140 to $160 (10% tariff on $140 is $14; $140+$14=$154; and round up to next multiple of 10 is $160). As a result, the price advantage of imported VCRs disappears, and consumers would buy more domestic VCRs. This causes an increase in demand for domestic VCRs and allows domestic producers to increase their price to $170. With the higher price, the domestic value added becomes $45 ($170-$125). Therefore, the best choice is C, which corresponds to domestic value added after the tariff.

Table 41Production Costs and Prices of Imported and Domestic VCRs