Question

Suppose you are in charge of pricing for a tobacco firm. Your company has recently faced large punitive damage penalties after losing a series of class-action lawsuits. You've been tasked with helping your company increase revenue. Which of the following statements is not true? A. You believe that consumers could easily substitute alcohol or marijuana for cigarettes. Therefore, you suggest that the company raise their price. B. Due to their addictive nature, you believe the demand for cigarettes is likely inelastic. Therefore, you suggest that the company raise their price.

Answer 1

If there are substitutes available for cigarettes or tobacco then increase in the price might motivate the people to shift for the substitute such as marijuana and this leads to decrease in the revenue all in all. Where people are addicted to cigarettes, increase in revenue can be caused by increase in the price as the demand would be inelastic because at any cost people would by them and therefore

(B) is the answer to the question