CFA Practice Question

There are 341 practice questions for this study session.

CFA Practice Question

The domestic demand Q for a good X at a price P is given by Q = 400 -2P while the supply function is given by 100 + 4P. The world price for good X is 45 in international markets. All quantities are in thousands of units. If the government imposes a tariff of 5% on imports, imports will be ______.
A. 13.25
B. 16.5
C. 19
Explanation: First note that without imports, the price prevailing in the domestic market will satisfy 400 - 2P = 100 + 4P, giving P = 50. The world price is 45; with a 5% import tariff, it becomes 45 * 1.05 = 47.25. Since this price is lower than 50, there will continue to be imports and the price prevailing in the domestic market after the tariff will equal 47.25.

Before the tariff, producers supplied a quantity equal to 100 + 4 * 45 = 280 and domestic consumers demanded 400 - 2 * 45 = 310 units. Thus, imports without the tariff equal 310 - 280 = 30 units. With the tariff in place, the producers produce 100 + 4 * 47.25 = 289 units. The consumers demand 400 - 2 * 47.25 = 305.5 units. Thus, the imports now equal 305.5 - 289 = 16.5 units.

User Contributed Comments 2

User Comment
danlan It is 400-2P-(100+4P)=300-6P=300-6*47.25=16.5
ramdabom The supply function is domestic also.
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