The U.S. 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 set is 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?

Solution Preview

The key to deal with this question is that the demand elasticity of cigarette is -2. First we want to interpret this number.

When elasticity < -1, we say this good is elastic (this means that consumers are more responsive to price changes). An elasticity of -2 means that if we raise the price by $1, we will lose 2 quantities.

When price is elastic, firms cannot increase revenue by increasing sales price (because the amount of extra money ...

The British Automobile Company is introducing a brand new model called the "London Special." Using the latest forecasting techniques, BAC economists have developed the following demand function for the "London Special":
Qd = 1,200,000 - 40P
What is the point price elasticity of demand at prices of:
a. $8000
b. $10,000

I hope you can help me with this:
Question 1
P 0 1 2 3 4 5 6
Qd 600 500 400 300 200 100 0
A. Graph the data above
b. Calculate the elasticity of demand, using the point formula, as price drops from $6 to 5, then from 5 to 4, 4 to 3, 3 to 2, 2 to 1, and, 1 to 0. Show all work.
C. Calculate the price elasticity

The demand for company X product is given by Q(x) = 12 - 3P(x)+ 4P (y)
Suppose good X sells for $3.00 per unit and good Y sells for $1.50 per unit.
a. Calculate the cross-price elasticity of demand between goods X and Y at the given prices.
b. Are goods X and Y substitutes or complements?
c. What is the own price elastici

Price rises from $10 to $15, and the quantity demanded falls from 100 units to 60 units. What is the coefficient of the price elasticity of demand between the two prices?
A) 1.25
B) 0.80
C) 0.60
D) 1.00

Price Elasticity
Briefly describe how knowledge of price elasticity among different groups of customers or for various products enable managers to price discriminate, or change different prices for these groups.

Demand for a managerial economics text is given by Q=20,000-300P. The book is initially priced at $30.00.
a. Compute the point price elasticity of demand at P=$30
b. If the objective is to increase total revenue, should the price be increased or decreased? Explain.
c. Compute the arc price elasticity for a price decrease fr

Sailright Inc. manufactures and sells sailboards. Management believes that the price elasticity of demand is -3.0. Currently, boards are priced at $500 and the quantity demanded is 10,000 per year.
A. If the price is increased to $600, how many sailboards will the company be able to sell each year?
B. The cross-price elas

What implicit assumptions would an researcher make regarding price elasticity of a magazine that was losing millions of dollars a yr and the CEO suggested raising the subcription price by 50%? The owner feels by raising prices you would lose a large % of subscribers.

If the demand for soda in a vending machine is represented by the equation Qd=120-40P, what is the price elasticity of demand if the price changes from 1.1 to 2.3? (Hint: you will first need to find the quantity purchased at the two different prices.)