CA Foundation · Business Economics · International Trade
When a small country imposes an import tariff on a good, which of the following is the most likely effect on its domestic market?
A tariff raises the domestic price of the imported good. The higher price encourages local producers to expand output while consumers buy less, so domestic production rises, consumption falls and imports shrink. The government also earns tariff revenue on the remaining imports.
- ADomestic price rises, domestic production rises and domestic consumption fallsCorrect
- BDomestic price falls, domestic production rises and consumption rises
- CDomestic price rises, domestic production falls and consumption rises
- DDomestic price stays unchanged, while government revenue rises
Explanation
A tariff raises the domestic price of the imported good above the world price. Higher price encourages domestic producers to produce more and discourages consumers, so consumption falls and imports decline. The other options give inconsistent combinations of price, output and consumption.
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