Chapter 1, Problem 1TC

To determine

Economic incentive.

Explanation of Solution

In general, the domestic firm sets up its production units with the foreign country due to the availability of lower wages and less regulations. These two major factors are giving incentive to move the investment from domestic country to rest of the world. This in turn reduces the job generation capacity in the domestic country.

When the tariff increases to 45%, then it increases the price of goods that produced in the foreign country. If the same good is produced within the country, then the cost of good is lower. The firms would find that it would be a benefit if it sets up production units in domestic country to meet its domestic demand. Thus, 455 tariffs serve as an incentive for firms to relocate their production unit within the domestic country.

Economics Concept Introduction

Concept introduction:

Economic incentives: Economic incentive refers to the additional benefit provided in order to achieve the desired economic activity and it also motivates an individual to perform an economical action.