Suppose That a Carton of Cigarettes Costs $55 in Springfield,Illinois

question 146

Essay

Suppose that a carton of cigarettes costs $55 in Springfield,Illinois but is just $50 in nearby St.Louis,Missouri.Use a supply and demand diagram to illustrate and explain what you would expect to happen in each location,assuming the law of one price holds.What is the most likely reason that a price difference persists between these two nearby locations?

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Definitions:

Opportunity Costs

The expense incurred by not choosing the second-best option available during decision-making.

Initial Cash Flow

The first influx or outflow of cash associated with an investment or project, marking the beginning of its cash flow timeline.

Sunk Costs

Expenses that have already been incurred and cannot be recovered, which should not influence future business decisions.

Replacement Projects

Investments made to replace worn-out or obsolete assets with new assets.