Determine effect on optimal price

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The United States cigarette industry has negotiated with Congress and government agencies to settle liability claims against it. Under the proposed settlement, cigarette firms will make fixed yearly payments to government based on their historic market shares. Assume a manufacturer estimates its marginal cost at $1.00 per pack, its own price elasticity at -2, and set is price at $2.00. The company's settlement obligations are expected to increase its average total cost per pack by about $.60. Determine what effect will this have on its optimal price?

Reference no: EM1374345

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