Samuelson and Marks, Check Station 5, P. 98.
The U.S. cigarette industry has negotiated with Congress and government agencies to settle liabilities 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 $2.00 per pack, its own price elasticity at -2, and sets its price at $4.00. The company’s settlement obligations are expected to raise its average cost per pack by about $.80. What effect will this have on its optimal price?
Samuelson, W.F., Marks, S.G. (2012). Managerial Economics (7th ed.). Hoboken, N.J.:John Wiley & Sons, Inc.