CFA Practice Question

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CFA Practice Question

Refer to the graph below of a small country that is a price-taker internationally. Assume the foreign supply of this product is perfectly elastic at a price of $4 per unit. Starting from a free trade equilibrium, a tariff in the amount of $2 per unit would be expected to cause domestic production to ______

A. increase from 6100 to 7400.
B. increase from 2400 to 3600.
C. decrease from 4800 to 3600.
Correct Answer: B

Since the world price is $4, a $2 per unit tariff means that foreign producers must charge $6 per unit. Domestic producers were willing and able to sell 2400 units at the free trade price of $4, but domestic output rises to 3600 when the price domestic sellers can charge increases to $6 (to be competitive with foreign suppliers).

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