Final answer:
The consumption effect of a tariff on imported automobiles is the decline in the purchase of the imported product due to the increase in its price, which leads consumers to either reduce consumption or shift to alternatives like domestic vehicles. The foreign price effect reinforces this by suggesting higher domestic prices decrease net exports. Additionally, tariff reductions lead to lower prices and higher quantities of imported goods sold. Therefore correct option is A
Step-by-step explanation:
The consumption effect of a tariff on imported automobiles refers to how the tariff impacts the purchasing behavior of consumers. The correct option is: a. the decline in the purchase of the imported product due to the increase in its price. A tariff is a tax imposed on imported goods and usually results in raising the price of the imported items. When the price of imported automobiles increases due to a tariff, it typically leads to a decline in their consumption because consumers may find the products too expensive or might shift to cheaper alternatives, including domestically produced automobiles.
As part of a broader economic analysis, we can review the foreign price effect which indicates that higher domestic prices, relative to international prices, can lead to a decrease in net export expenditures. When applied to the tariff situation, if the price of imported automobiles rises in the U.S. due to the tariff and stays the same in other countries, U.S. consumers are more likely to turn away from more expensive imports and possibly consume more domestically-produced automobiles.
If the U.S. government reduces tariffs, as in the example of a cut on imported flat screen televisions, the equilibrium price for these TVs would be expected to decrease and the quantity sold to increase. This is because the lower tariff reduces the cost of the imported good, potentially making it more attractive to buyers and thus increasing its consumption.