Assume that India currently imports 10 million tonnes of rice annually with an import duty of 5%. If the government increases the duty to 10%, estimate the reduction in import quantity assuming a 1% decrease in demand for every 1% increase in duty. How much will the import quantity reduce and what will be the new total imports?
Answer
Import quantity reduces by 0.5 million tonnes; new imports = 9.5 million tonnes
The correct answer is Import quantity reduces by 0.5 million tonnes; new imports = 9.5 million tonnes — State final reduction and new import quantity.
Step-by-step solution
- Calculate duty increase: (10% - 5% = 5%).
- Translate to demand drop: 5% increase in duty → 5% decrease in demand.
- Compute new imports: (10,\text{million} \times (1 - 0.05) = 9.5,\text{million}) tonnes.
- Determine reduction: (10 - 9.5 = 0.5,\text{million}) tonnes.
- State final reduction and new import quantity.
Common mistake: Misapplying percentage change (adding instead of multiplying)
Concept tested: Trade policy impact on food security
Published · How this solution was prepared and checked
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