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IAI Actuarial Core Principles · Business Economics · Importance of international trade

A government imposes a specific tariff of ₹40 per unit on imported steel sheets. Before the tariff, the world price was ₹200 per unit and the country imported 500 units. After the tariff, domestic price rises to ₹240 and imports fall to 300 units. Assuming the country is a small price taker in world markets, what is the tariff revenue collected by the government?

Tariff revenue is ₹12,000. It equals the ₹40 tariff multiplied by the 300 units still imported after the tariff. Using the earlier 500 units would be wrong because the duty is collected only on goods actually imported under the tariff.

  1. A₹8,000
  2. B₹12,000Correct
  3. C₹20,000
  4. D₹2,000
  5. ₹16,000

Explanation

Tariff revenue = tariff per unit × post-tariff imports = 40 × 300 = ₹12,000. Using pre-tariff imports (500) gives ₹20,000, which is wrong because the tariff is collected only on units actually imported after it is imposed. ₹8,000 uses the fall in imports (200) instead.

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