The US cigarette industry has negotiated with Congress and government agencies t

Question

The US cigarette industry has negotiated with Congress and government agencies to settle liability claims against it. Under the proposed settlement, cigarette companies will make fixed annual payments to the government based on their historic market shares. Suppose a manufacturer estimates its marginal cost at $1.00 per pack, its own price elasticity at -2, and sets its price at $2.00. That company's settlement obligations are expected to raise its average total cost per pack by about $.60. What effect with this have on its optimal price?

Explanation / Answer

This problem can be solved using a variation of the MR = MC rule for optimal level of output in previous assignments. The markup rule is used to find profit maximizing price. Optimal price is expressed:

P

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.