Suppose a domestically produced motor bicycle sells at a world price of $5,000 under unrestricted trade. The domestic producer uses $3,000 worth of imported inputs. Suppose a 10 percent ad valorem (on the value) tariff is imposed on the imported motor bicycle.

a. What is the domestic price of the imported motor bicycle? (0.5 points)

b. What is the possible price of the domestically produced motor bicycle? (0.5 points)

c. What is the effective rate of protection (ERP)? (1 point)

Suppose now that the 10 percent tariff on finished motor bicycles is accompanied by a 5 percent tariff on imported components used in the domestic production of motor bicycles.

d. What price do domestic producers pay on the imported components that they use as inputs? (0.5 points)

e. What is the value of the new ERP? (1 point)

f. Suppose that the government decided to tax the imported inputs by the same rate (10 percent) as the finished imported good. What is the ERP under this condition? (1 point)