The U.S. Cigarette industry has negotiated with Congress and government agencies

Question

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?

Explanation / Answer

negative price elasticity marginal cost at $1.00 per pack price at $2.00 profit= 1$ raise average total cost per pack by about $.60 new= 1.6$ therefore optimal price would become >2$ but less than 2.6$ due to negative price elasticity therefore it will be about 2.5$ answer please rate appreciated

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