Recently, the major firms in the United States cigarette industry joined with the government in a settlement of liability claims. Under the tentative agreement, the industry would curb advertising and pay the equivalent of about $15 billion per year (for smoking-related state Medicaid expenses) in exchange for protection against smoker lawsuits. a) Before the settlement, a leading cigarette manufacturer estimated its marginal cost at $1.00 per pack and its elasticity of demand at -2. What is its optimal price? The firm’s share of the industry payment (based on its historic market share) will raise its average total cost per pack by $.60. What effect will this have on its optimal price? b) A marketing manager suggests that the firm should offer price discounts to the company’s long- term, older, most-loyal (addicted?) customers. Do you agree? Explain carefully. c) In the past, anti-smoking information campaigns have had some limited success in reducing smoking. What price reaction (if any) would the cigarette companies have to such programs? Explain carefully.
Recently, the major firms in the United States cigarette industry joined with the government in a
settlement of liability claims. Under the tentative agreement, the industry would curb advertising
and pay the equivalent of about $15 billion per year (for smoking-related state Medicaid expenses)
in exchange for protection against smoker lawsuits.
a) Before the settlement, a leading cigarette manufacturer estimated its marginal cost at $1.00 per
pack and its elasticity of demand at -2. What is its optimal price? The firm’s share of the industry
payment (based on its historic market share) will raise its
effect will this have on its optimal price?
b) A marketing manager suggests that the firm should offer price discounts to the company’s long-
term, older, most-loyal (addicted?) customers. Do you agree? Explain carefully.
c) In the past, anti-smoking information campaigns have had some limited success in reducing
smoking. What price reaction (if any) would the cigarette companies have to such programs?
Explain carefully.
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