Final answer:
If Reynolds increases cigarette prices by 10% and the price elasticity of demand is 0.4, the increase in its annual revenue would be $440 million.
Step-by-step explanation:
The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. A price elasticity of demand of 0.4 means that for every 1% increase in price, the quantity demanded decreases by 0.4%.
If Reynolds increases cigarette prices by 10%, the percentage change in quantity demanded can be calculated by multiplying the price elasticity of demand with the percentage change in price:
Percentage change in quantity demanded = 0.4 x 10%
= 4%
To calculate the increase in annual revenue, we can multiply the percentage change in quantity demanded with the annual revenue:
Revenue increase = 4% x $11 billion
= $440 million