Marginal Cost and Optimal Price: The U.S. Cigarette Industry
The U.S. Cigarette industry has negotiated with Congress and government agencies to settle liability claims against it. Under proposed settlement, cigarette companies will make fixed annual payments to government based on their historical 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. The company's settlement obligations are expected to raise its average total cost per pack by about $.60. What effect will this have on its optimal price?