Before the tariff, trade with China pushes the price of a bra downward to 8 euro
ID: 1100837 • Letter: B
Question
Before the tariff, trade with China pushes the price of a bra downward to 8 euros in the EU market. At this price, European consumers purchase 30 million bras (as determined by the EU demand curve), and 10 million of these bras are purchased from EU bra makers (as determined by the EU supply curve). The difference, 20 million bras, is imported from China.
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Consider the differences between tariffs and import quotas.A tariff is a tax, or excise tax, levied on the sale of imported goods. A tariff raises excise revenue for the government. For example, an EU tariff might take the form of a 2-euro excise tax on each bra coming from China. The graph below shows the effect of a 2-euro tariff in the market for bras in the EU. For simplicity, assume that the EU imports bras only from China. Notice that in the absence of trade, the price of a bra in the EU would be 12 euros, at the intersection of EU supply and EU demand.
Before the tariff, trade with China pushes the price of a bra downward to 8 euros in the EU market. At this price, European consumers purchase 30 million bras (as determined by the EU demand curve), and 10 million of these bras are purchased from EU bra makers (as determined by the EU supply curve). The difference, 20 million bras, is imported from China.
Explanation / Answer
After the imposition of the tariff, the price becomes 8+2=10 euros as the line shows in the diagram.At this price the demand is 25 million and the EU supply is 15 million so the deficit of 25-15=10 million is imported from china
Answer: B
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