Question

Assume there is a 35% tariff on bananas imported into the United States. Also, assume that the market competition is at its beginning and the law of one price is not in effect. If the domestic market price of Hawaiian bananas is one dollar per bunch, imported bananas will sell for________.

a.$1.00/bunch.
b.$0.35/bunch.
c.$0.65/bunch.
d.$1.65/bunch.
e.$1.35/bunch

Answer 1

E) $1.35/bunch

Step-by-step explanation:

In this case, to calculate the cost of imported bananas all we have to do is multiply the cost of domestic bananas by 135%.

This is not how it works in real life. Usually foreign products pay tariffs according to their FOB values, they don't use the local market values as reference values. That is the reason why imported goods can negatively affect domestic industries since some foreign markets are able to produce much cheaper products than American industries. Even if you add the import tariffs some foreign products may still be much cheaper than domestic products.