![6. 4 marks] Assuming that shoes have a world price of US$60 each, that the EU has a 45% ad valorem import duty on footwear which applies to all types of footwear and an Italian company is proposing a project to substitute 150,000 imported shoes by domestically produced shoes. The annual cost of the project (operating cost plus annual equivalent capital cost) at both market and efficiency prices is $9.4 millions. Apart from the tariff there are no other distortions to the EU domestic price of shoes. Calculate the net annual benefit of the project:](http://img.homeworklib.com/questions/86fc9f60-3cd9-11ea-a06e-0fe0a9fef2be.png?x-oss-process=image/resize,w_560)
(a). at market price?
(b) at efficiency price?
Homework Answers
The world price of Footwear = $60 Import duty of EU on footwear = 45%
Therefore, market price of Footwear in Italy = 60*1.45= $87
The world price of footwear is also efficiency price of footwear in domestic market of Italy.
Number of imported shoes to be replaced by domestic shoes = 150000
Therefore, total revenue from domestic shoe production at market price = 150000*$87= $13050000
Total revenue from domestic shoe production at efficiency price = 150000*$60 = $9000000
The annual cost of project = $9.4 millions = $9400000
Therefore a) Net annual benefit of project at market price = $13050000-$9400000= $3650000
b) Net annual benefit of project at efficiency price = $9000000-$9400000= $-400000
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