Deck 19: Pricing Concepts

Question 1

Explain what is meant by price elasticity of demand.

Answer 1

Price elasticity of demand provides a measure of the sensitivity of consumer demand for a product or product category to changes in price. Elasticity is formally defined as the percentage change in quantity demanded relative to a given percentage change in price. For a product with highly elastic demand, a relatively small increase in price results in a huge change in quantity sold. Non-essential items or those with ready substitutes tend to have more elastic demand. If marketers can determine the price elasticity of demand for a product, setting a price is easier. By analyzing total revenues as prices change, marketers can determine whether a product is price elastic. Total revenue is price multiplied by quantity. If demand is elastic, a shift in price causes an opposite change in total revenue: An increase in price will decrease total revenue, and a decrease in price will increase total revenue. The following formula determines the price elasticity of demand: price elasticity of demand = % change in quantity demanded/ % change in price.

Question 2

What are the implications of a downward-sloping demand curve?

Answer 2

Most firms face downward-sloping demand curves for their products. In other words, they must lower their prices to sell additional units. This situation means that each additional unit of product sold provides the firm with less revenue than the previous unit sold. Marginal revenue decreases as price decreases and quantity sold increases. Marginal revenue (MR) is the change in total revenue that arises from the sale of an additional unit of a product. Eventually, marginal revenue will reach zero, and the sale of additional units actually causes the firm to lose money.

Question 3

What do all of the following have in common: tuition, fee, premium, retainer, dues?

A) They are all usually paid in cash.
B) They are forms of exchange similar to, but not identical with, money.
C) They are forms of exchange similar to, but not identical with, barter.
D) They are different terms for the concept of price.
E) They have nothing in common.

Answer 3

D

Question 4

Trading products is the oldest form of exchange, and is commonly known as

A) credit.
B) buying.
C) purchasing.
D) barter.
E) pricing.

Question 5

How can transfer pricing be calculated? Give three alternatives.

Question 6

Price is a key element in the marketing mix because it relates directly to

A) the size of the sales force.
B) the speed of an exchange.
C) quality controls.
D) the generation of total revenue.
E) brand image.

Question 7

If fixed costs = $6,000, selling price = $10, and variable costs per unit = $5, what is the breakeven point in units and in dollar sales volume?

Question 8

Suppose Tommy Hilfiger is introducing a new line of men's ties. The designer believes that the target market for these ties comprises men who are very status-conscious. In keeping with this assessment, department stores selling the ties should

A) charge a price based on their cost.
B) charge prices consistent with their existing ties.
C) discount the ties.
D) negotiate the price with individual tie shoppers.
E) use price symbolically.

Question 9

How would pricing decisions differ for a business in an oligopolistic market structure as opposed to a monopolistic market structure?

Question 10

What are reference prices and how do customers use them? What is the difference between internal and external reference prices?

Question 11

Identify and describe the major types of discounts used for business markets. Then explain the reasons for using each type.

Question 12

Logan is reading the online report of the tuition and fees he owes for this semester of college. Since he has signed up for online banking, he pays the amount immediately. The amount Logan just paid is considered to be

A) his expenses.
B) his charges.
C) his bill.
D) the price.
E) the exchange valuations.

Question 13

What equation shows organizations the relationship between price and profit?

A) Total Variable Costs + Total Fixed Costs = Sales − Profit
B) Price = Profit per Item × Number of Units Sold
C) (Price × Quantity Sold) − Total Costs = Profits
D) (Price − Profits) × Total Costs = Sales
E) Total Costs = (Price × Quantity Sold) − Profits

Question 14

Price is considered to be the variable in the marketing mix that is

A) least flexible.
B) most flexible.
C) most difficult.
D) first to be decided.
E) last to be decided.

Question 15

What are the differences among value-conscious, price-conscious, and prestige-sensitive customers?

Question 16

Compare and contrast price and nonprice competition. Give examples of firms that compete on a price basis and on a nonprice basis.

Question 17

Identify and describe the major factors that affect pricing decisions.

Question 18

Price is

A) money paid in a transaction.
B) not important to buyers.
C) of limited interest to sellers.
D) the most inflexible marketing mix decision variable.
E) the value that is exchanged for products in a marketing transaction.

Question 19

Why is the marginal revenue of a product important to the marketer?

Question 20

What are the terms of F.O.b. pricing?

Question 21

One advantage of nonprice competition is that

A) a firm can react quickly to competitive efforts.
B) market share becomes less important.
C) a firm can build customer loyalty.
D) marketing efforts are completely eliminated.
E) pricing is no longer a factor.

Question 22

A product under nonprice competition would most likely not succeed in the market if

A) a new advertising campaign is established for it.
B) it is easy to duplicate.
C) it is packaged differently from similar products.
D) it is priced near the competitors' price.
E) its quality has been upgraded.

Question 23

Advertisements for Suave shampoos emphasize that other shampoos may cost more but don't work any better than Suave. In this example, Suave is competing on the basis of

A) product attributes.
B) product performance.
C) product price.
D) available selection.
E) product packaging.

Question 24

For most firms in the United States, demand curves are

A) upward sloping.
B) completely horizontal.
C) completely vertical.
D) C-shaped.
E) downward sloping.

Question 25

What does the demand curve for a prestige product look like?

A) It is a straight line where the quantity sold continues to increase as the price of each product increases.
B) It is a curve where the highest and the lowest prices yield the greatest quantity sold and mid-range prices produce the fewest sales.
C) It forms a curve where the greatest quantity sold comes at a medium price, and the quantities fall as the price increases or decreases.
D) It forms a straight vertical line because of the prestige of the product, and quantity sold will remain stable regardless of the price.
E) It slopes from left to right at a very mild slope; that is, as quantity increases, price decreases slowly.

Question 26

If a product has an inelastic demand and the manufacturer raises its price,

A) total revenue will increase.
B) quantity demanded will decrease.
C) the demand schedule will shift.
D) the demand will become more inelastic.
E) total revenue will decrease.

Question 27

If Wilson Sporting Goods faces a standard demand curve that exists for most products, as it raises the price of its tennis rackets, the

A) quantity demanded goes down.
B) demand remains constant.
C) quantity demanded increases.
D) demand increases.
E) breakeven increases.

Question 28

Which of the following statements about price elasticity is false?

A) Steak is an example of a product that has an elastic demand for most people, because when price goes up quantity demanded goes down proportionally.
B) Elasticity of demand is the relative responsiveness of a change in quantity demanded to changes in price.
C) If marketers can determine price elasticity, then setting prices at optimum levels is much easier.
D) When price is raised on a product that has an inelastic demand, then total revenue will decrease.
E) A product like electricity has an inelastic demand.

Question 29

For most products, a(n) ____ relationship exists between the price of a particular product and the quantity demanded.

A) inelastic
B) inverse
C) positive
D) unknown
E) elastic

Question 30

Sellers that emphasize distinctive product features to encourage brand preferences among customers are practicing

A) product competition.
B) nonprice competition.
C) brand differentiation.
D) price competition.
E) competitor differentiation.

Question 31

French Quarter Inns drops the price of a suite from $225 to $195 per night and experiences a reduction in the quantity of rooms demanded of an average of five per night. This is an indication that suites at this hotel are apparently an example of a(n) ____ product.

A) reverse-demand
B) inferior
C) standard
D) secondary-demand
E) prestige

Question 32

A measure of sensitivity of demand in relation to changes in price is

A) a demand curve.
B) a prestige graph.
C) marginal analysis.
D) price elasticity of demand.
E) quantity elasticity.

Question 33

When marketers emphasize price as an issue and match or beat the prices of other companies, they are using

A) price competition.
B) nonprice competition.
C) comparative pricing strategies.
D) demand-based pricing.
E) supply-based pricing.

Question 34

Which of the following statements about nonprice competition is false?

A) Companies that use nonprice competition do not need to keep track of their competitor's prices.
B) A company must be able to distinguish its brand through some unique feature in order to successfully engage in nonprice competition.
C) A firm using nonprice competition can build loyalty to both its company and its products.
D) When using nonprice competition, a company should promote the distinguishing characteristics of its brand.
E) Buyers must view the distinguishing characteristics of a product offered through nonprice competition as being important.

Question 35

A graph of the quantity of products marketers expect to sell at various prices if other factors remain constant is a

A) price graph.
B) supply curve.
C) price/quantity graph.
D) marginal revenue curve.
E) demand curve.

Question 36

Safe Auto advertises its automobile insurance as "minimum coverage for minimum budgets." Safe Auto is engaging in

A) nonprice competition.
B) demand-based pricing.
C) competitive pricing.
D) price differentiation.
E) price competition.

Question 37

Which of the following is most likely to have an inelastic demand curve?

A) Automobile
B) Vacation
C) Nonelective surgery
D) Recreational vehicle
E) Computer

Question 38

Isabella is a product manager for The Container Store, a retailer of plastic bins and other storage containers. Sales have been declining in the past nine months and her management team is pressuring her to compete based on price discounts. However, Isabella is aware of the dangers associated with engaging in price competition. She knows that competitors can also change prices quickly and aggressively, which can result in a(n) ____ that will be harmful to both companies.

A) reduction in cost
B) price war
C) competitive game
D) industry collapse
E) advertising battle

Question 39

If Carnival Cruise Lines increased the price of its seven-day cruise package by 10% and, as a result, experienced a 20% decline in customer bookings, Carnival's demand would be

A) steady.
B) inelastic.
C) elastic.
D) prestige.
E) marginal.

Question 40

Which of the following products is most likely to have an inverted C-shaped demand curve?

A) Visit to the Dentist
B) Eternity perfume
C) Starbucks coffee
D) Pillsbury cake mix
E) Ford Escape

Question 41

If Colgate-Palmolive wants to maximize profit on its toothpaste, it should operate at the point where

A) total costs and total revenues are equal.
B) marginal revenue is at its highest level.
C) marginal revenue exceeds marginal cost.
D) marginal revenue equals marginal cost.
E) demand is most elastic.

Question 42

To determine the breakeven point in units, divide the fixed costs by

A) total costs.
B) variable costs times price.
C) price minus variable costs.
D) price per unit.
E) total revenue minus fixed costs.

Question 43

Ethan is an operations unit manager for Morningstar Foods. So far in developing his monthly budget, he has identified the following costs: Overhead at $120,000; Packaging at $70,000; Advertising at $60,000; Salaries at $400,000; Food production at $90,000; and Distribution at $22,000. The fixed costs in this situation would be

A) overhead, packaging, advertising, salaries, food production, and distribution.
B) overhead, packaging, advertising, salaries, and distribution.
C) overhead, advertising, distribution, and salaries.
D) overhead, advertising, and salaries.
E) overhead.

Question 44

Suppose managers at Caterpillar have determined the costs associated with producing hay balers are equal to the price that they charge for the hay balers. This indicates that Caterpillar is producing at the ____ point.

A) breakeven
B) marginal revenue less than marginal cost
C) profit margin
D) competitive price
E) profit maximizing

Question 45

The Palasi Candy Company is a small business located in the northeastern United States. The owner of Palasi Candy is calculating the projected costs for the coming year. There is rent for the building; salaries for the retail employees; raw materials of sugar, chocolate, and other ingredients; wrappers for packaging of individual pieces of candy; boxes; and radio advertising. Palasi's ______ are most likely to be the raw materials of sugar, chocolate, and other ingredients, as well as the wrappers.

A) sunk costs
B) variable costs
C) direct costs
D) fixed costs
E) marginal costs

Question 46

Dividing the percentage change in quantity demanded by the percentage change in price gives the

A) prestige demand curve.
B) breakeven point.
C) marginal cost curve.
D) price sensitivity curve.
E) price elasticity of demand.

Question 47

Marginal analysis involves examining

A) what happens to a firm's costs and revenues when production is changed by one unit.
B) what happens to a firm's revenues when one more product is sold.
C) what happens to a firm's costs when one more unit is produced.
D) the difference between marginal revenue and total revenue.
E) the difference between marginal cost and total cost.

Question 48

The Highland Racquet Club found that with annual fixed costs of $60,000, its breakeven point is 2,000 members when the membership charge is $60 per person per year. What is the variable cost per person for Highland?

A) $45
B) $50
C) $30
D) $25
E) $40

Question 49

Markum Industries determines that for its air compressors the following results are achieved at a price of $250: total costs = $250,000; variable costs per unit = $100; fixed costs = $175,000. Given these figures, Markum would break even at ____ units.

A) 1,167
B) 1,000
C) 1,750
D) 2,500
E) 700

Question 50

When marginal cost is equal to marginal revenue, the firm should

A) produce more to increase profits.
B) produce less to decrease total costs.
C) stop producing additional units to maximize profits.
D) provide discounts to encourage purchases.
E) intensify distribution to increase sales.

Question 51

If the product price is $100, average variable cost $40 per unit, and the total fixed costs are $120,000, what is the breakeven point?

A) 500 units
B) 2,000 units
C) 1,200 units
D) 300 units
E) 3,000 units

Question 52

At the breakeven point,

A) the money a company brings in from selling products equals the amount spent producing the products.
B) the total fixed costs are exactly equal to the total variable costs.
C) profits are exactly equal to the difference between revenue and total variable costs.
D) the marginal revenue of a product is exactly equal to the marginal cost of producing one more unit.
E) the marginal cost curve and the average cost curve will be identical for a particular product.

Question 53

At what point does a firm maximize profit?

A) The point at which marginal cost equals marginal revenue
B) The point at which the firm sells its product at the highest price
C) The breakeven point plus the adjusted marginal cost
D) The point at which marginal profits equal marginal revenue
E) The point at which marginal cost equals marginal profits

Question 54

The owner of Big Bike Motorcycles is opening a new retail location. Which of the following is most likely to be a fixed cost for Big Bike Motorcycles?

A) Retail personnel salaries
B) Advertising on Facebook
C) Building rent
D) Electricity
E) Transportation of sold bikes

Question 55

A certain location of O'Charley's restaurant has annual fixed costs of $200,000. If an average tab at the restaurant is $60 and the variable costs per tab is $20, how many groups of customers must O'Charley's serve per year in order to break even?

A) 2,000
B) 5,000
C) 10,000
D) 3,333
E) 2,500

Question 56

Michelin notices that when the number of tires it sells increases from 1,000,000 to 1,000,001, total revenue rises $35. The $35 represents the firm's

A) average revenue.
B) marginal revenue.
C) price elasticity.
D) average variable revenue.
E) average total cost.

Question 57

If a company increased its price from $100 to $120 and the quantity demanded fell by 40%, the price elasticity of demand for this product is

A) 2.
B) 1/2.
C) −1/2.
D) −2.
E) 4.

Question 58

Jared is developing a business plan for a new type of bicycle helmet. He is interested in finding the point at which the costs of producing the helmet will equal the revenue earned from selling the product. Jared is interested in finding the

A) elasticity of demand.
B) breakeven point.
C) variable costs.
D) price elasticity.
E) the sum of fixed costs.

Question 59

If Pacific Power and Light increased its rates by 10% and experienced a 2% reduction in the demand for power, the demand would be

A) elastic.
B) minimal.
C) minor elasticity.
D) variable.
E) inelastic.

Question 60

If a firm currently produces 2,500 products per month and decides to produce 2,501, it will incur

A) more fixed costs.
B) higher average fixed costs.
C) fewer variable costs.
D) a marginal cost.
E) higher average variable costs.

Question 61

A company trying to position itself as value oriented should not

A) set prices that are reasonable relative to product quality.
B) use premium pricing for its products.
C) set prices similar to those of its competitors.
D) use any advertising for its products.
E) consider costs when determining the price of products.

Question 62

The amount of profit a channel member expects depends on

A) the amount of discounts for large orders provided by the producers.
B) the number of channel support activities provided by the producers.
C) what the intermediary could earn if it were handling a competing product instead.
D) the type of distribution channels involved.
E) the amount of effort required to carry the product.

Question 63

The degree to which the price of a product enhances a customer's satisfaction with the purchase experience and with the product after the purchase is part of their

A) response.
B) reference.
C) interpretation.
D) price satisfaction.
E) price-consciousness.

Question 64

Duds and Suds is a bar with a country and western atmosphere. In addition to the bar, Duds and Suds has a gift shop that sells western clothing with its logo. Norman is the owner of the business and has recently enacted temporary price reductions through clearance sales, discounts, and nightly drink specials. What is Norman most likely trying to do?

A) Raise cash quickly
B) Decrease costs
C) Increase profitability
D) Run off the competition
E) Create a value image

Question 65

Since Victoria's Secret has decided to use nonprice competition, it distinguishes its brand through all but which of the following?

A) Distinctive product features
B) Exceptional service
C) Rebates
D) Variety and selection
E) Product quality and style

Question 66

What assumption does breakeven analysis make that limits its overall usefulness?

A) It focuses on how to achieve a price objective.
B) It assumes a company wants to gain a certain market share.
C) It relies on demand for a product being inelastic.
D) It focuses only on competitive factors and not costs.
E) It assumes demand is elastic for the product.

Question 67

The types of prices that appear most often in ads are ___,while the types of prices that occur least often in ads are ____ prices.

A) reference; comparison
B) discount; cost-plus
C) bargain; premium
D) comparison; cost-plus
E) sale; reference

Question 68

Mars Petcare is one of the world's largest pet food manufacturers. If the strategic goal for Mars Petcare in the coming year was to ___________ in North America, it should use temporary price reductions.

A) increase the number of competitors
B) gain market share
C) decrease volume sold
D) increase revenue per item
E) decrease the number of competitors

Question 69

In the long run, the J.M. Smucker Company must view ____ as the absolute lowest price for its Jif brand peanut butter.

A) a 10% return on investment
B) product development costs
C) total costs
D) advertising expenditures
E) Nestlé's prices

Question 70

To maintain market share and revenue in an increasingly price-sensitive market, companies have focused on quality, used labor-saving technologies, and used efficient manufacturing processes. These tactics have provided gains in productivity that have translated into ____ for the consumer.

A) higher costs for the company and higher prices
B) higher costs for the company and lower prices
C) lower costs for the company and lower prices
D) lower costs for the company and higher prices
E) no change in the costs for either the company or

Question 71

For most consumers, there is an assumed relationship between

A) price and quality.
B) value and cost.
C) internal and external reference prices.
D) value and price consciousness.
E) prestige prices and value.

Question 72

Which of the following is not a major factor for firms making price decisions?

A) Costs
B) Competition
C) Previous sales
D) Channel member expectations
E) Legal and regulatory issues

Question 73

Which factor is least likely to affect pricing decisions?

A) Competitive prices
B) Legal and regulatory issues
C) Organizational and marketing objectives
D) Customers' interpretation and response
E) Shifting stock values

Question 74

Abby is a marketing consultant who specializes in small businesses. Her current client is very interested in estimating the costs for the coming year, in order to find the breakeven point. Abby knows this is an important financial statistic because below the breakeven point, the firm is operating

A) with fixed costs only.
B) with minimal variable costs.
C) with no revenue.
D) with minimal profit.
E) at a loss.

Question 75

Which of the following products is most likely to involve personal selling?

A) Blenders at a department store
B) Riding lawn mowers
C) Kindle Fire
D) Picture frames at a hobby supply store
E) Footballs at a sporting goods store

Question 76

Marketers generally view ____ as the minimum price a product can be sold for.

A) fixed costs
B) variable costs
C) profits
D) costs
E) moderate losses

Question 77

What a price means or what it communicates to customers is called

A) reference.
B) response.
C) interpretation.
D) internalization.
E) signaling.

Question 78

Generally, customers are most likely to rely on the price-quality association when

A) they cannot judge the quality of the product for themselves.
B) the product is a well-known brand.
C) customers can judge the product's quality for themselves.
D) the product is purchased through the use of the Internet.
E) products are being purchased from well-established retailers that are familiar to customers.

Question 79

Premium-priced products are usually marketed through

A) complex marketing channels.
B) intensive or selective distribution.
C) exclusive or intensive distribution.
D) exclusive distribution only.
E) selective or exclusive distribution.

Question 80

To gain market share, when Hyundai first entered the U.S. car market it did so with a comparatively low pricing strategy. One of the negative side effects of making this pricing decision is

A) a negative impact on consumers' perceptions of quality.
B) difficulty lowering the prices later.
C) a high return on investment level affecting tax balances owed.
D) poor survival chances.
E) higher developmental costs.