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. Supposed a manufacturer estimates its marginal costs at $1.00per pack, its own price elasticity at -2, and sets its 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?

In 200-300 words, address the challenges and opportunities managers face in culturally diverse and global organizations. Apply concepts/terms from Chapter 3 of your textbook.

Do your own work.

To determine the effect of the settlement obligations on the company's optimal price, we can use the concept of marginal cost, price elasticity, and the average total cost.

First, let's understand what these terms mean:

1. Marginal cost (MC): It refers to the cost of producing one additional unit of a product. In this case, the manufacturer estimates its marginal cost at $1.00 per pack.

2. Price elasticity of demand (PED): It measures the responsiveness of the quantity demanded to a change in price. A price elasticity of -2 suggests that for every 1% increase in price, the quantity demanded will decrease by 2%.

3. Average total cost (ATC): It represents the total cost of production divided by the number of units produced. The settlement obligations are expected to increase the average total cost per pack by about $0.60.

Given that the company sets its price at $2.00, we can now analyze the effect of the settlement obligations on its optimal price.

To find the optimal price, the company needs to ensure that its marginal cost equals its marginal revenue (MR). MR can be estimated by multiplying the price by (1 + PED).

MR = Price * (1 + PED)
= $2.00 * (1 + (-2))
= $2.00 * (-1)
= -$2.00

Since marginal cost is $1.00, we need to find the price that equals -$2.00:

-$2.00 = $1.00 * (1 + PED)

Solving for PED:
(1 + PED) = -2.00 / $1.00
PED = (-2.00 / $1.00) - 1
PED = -3

The price elasticity of demand is -3.

Now, let's calculate the new price that takes into account the increase in average total cost per pack due to the settlement obligations.

New ATC = Old ATC + Increase in ATC
= $1.00 + $0.60
= $1.60

To calculate the new optimal price, we use the formula:

New Price = ATC * (1 + PED)
= $1.60 * (1 + (-3))
= $1.60 * (-2)
= -$3.20

Since negative prices are not realistic, the new optimal price, taking into account the settlement obligations, will be $0.00. This means that the company will have to give away the cigarettes for free to cover its costs and honor its settlement obligations.