Question

Suppose an industry receives protection from the government in the form of tariffs. A number of years​ later, it is observed that the quantity supplied by domestic firms had decreased and that the domestic price was substantially greater than the world price. We could conclude that A. the tariff had been imposed to protect an infant industry and that the industry still needed protection. B. the tariff had been imposed to counteract dumping and had been successful. C. removal of the tariff would cause domestic output to fall even further and the price to fall to consumers. D. removal of the tariff would actually cause domestic output to increase and price to fall.

Answer 1

Answer: D. removal of the tariff would actually cause domestic output to increase and price to fall.

Explanation:

The tariff led to a situation where the industry being protected became inefficient because it did not have enough competition. This is why they are producing less quantities and at higher prices.

If the tariff was to be removed, the industry would get fresh competition from outside the country. This would force them to become more efficient and the would start producing more goods. Prices would also drop on account of the increased supply from both domestic and foreign companies.