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    Optimal pricing is assessed.

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    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?

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    Has no effect.

    Recall that for any firm, the profit maximizing rule is always marginal cost = marginal revenue. So no matter how fixed ...

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    Optimal pricing is assessed.