Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 19

You manage a company that competes in an industry that is comprised of four equal-sized firms that produce similar products. A recent industry report indicates that the market is fairly saturated, in that a 10 percent industrywide price increase would lead to an 18 percent decline in units sold by all firms in the industry. Currently, Congress is considering legislation that would impose a tariff on a key input used by the industry. Your best estimate is that, if the legislation passes, your marginal cost will increase by $2. Based on this information, what price increase would you recommend if the tariff legislation is passed by Congress? Explain.