Question 1

Target-return pricing adds one critical element to the pricing equation over mark-up pricing.Which is this additional cost element?

Accepted Answer

Target-return pricing takes into account the cost of invested capital, which is the cost of the funds used to develop or produce the product. This is the additional cost element that is not considered in mark-up pricing.

Question 2

If a company institutes a 3% price decrease and the result is a 6% increase in the quantity demanded,what is the price elasticity of demand for the product?

Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, it is (6% / -3%) = -2, indicating a price elasticity of demand of -2.

Question 3

Which of the following is the formula for determining price elasticity of demand?

Accepted Answer

The formula for determining price elasticity of demand is the percentage change in quantity demanded divided by the percent change in price. This means that we are looking at how much the quantity demanded changes in response to a change in price.

Question 4

Which of the factors affecting customers' sensitivity to price is Duracell emphasizing when it claims in television ads that its batteries last longer than its competitors'?

Accepted Answer

Duracell is emphasizing the unique-value effect by highlighting that its batteries last longer than its competitors', implying that customers will get better value for their money by choosing Duracell over other brands. This can increase customers' sensitivity to price, as they may see Duracell as a better long-term investment despite its higher initial cost.

Question 5

The price elasticity of demand is the:

Accepted Answer

The price elasticity of demand measures how responsive the quantity demanded of a good or service is to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. A high price elasticity of demand means that a small change in price results in a large change in quantity demanded, indicating that consumers are very sensitive to price changes. Conversely, a low price elasticity of demand means that a change in price has little effect on the quantity demanded, indicating that consumers are not very sensitive to price changes.

Question 6

Buyers of GTB automobiles perceive such cars as more luxurious and more prestigious than other automobiles and are willing to pay more for these cars.This is an example of the _____ effect.

Accepted Answer

The given scenario is an example of the price-quality effect where buyers perceive the higher price of GTB automobiles as an indicator of higher quality and prestige. This perception leads to a willingness to pay more for these cars compared to other automobiles.

Question 7

What is the break-even volume (in units)if the fixed cost of production is $1 million,the price of the product is $50,and variable cost is $25 per unit?

Accepted Answer

The answer of What is the break-even volume (in units)if...

Question 8

When firms use the going-rate pricing approach,they base product prices on:

Accepted Answer

When firms use the going-rate pricing approach, they base their product prices on the prices charged by their competitors for similar products. This approach involves setting the price of the product at a similar level to the market average or the price of the competitor's product. This helps the firm to stay competitive and avoid losing customers to the competition. The going-rate pricing approach is most commonly used in highly competitive markets where the price is the main factor that customers consider when comparing products.

Question 9

Aries,a small-appliance manufacturer,produces a line of mixer-grinders and expects to sell 60,000 units in the coming period.A fixed cost of $600,000 is associated with producing the mixer-grinders,and variable cost is $20 per unit.The unit cost for each mixer-grinder would be _____.

Accepted Answer

To find the unit cost for each mixer-grinder, we need to add the fixed cost and the variable cost per unit.
Variable cost per unit = $20
Fixed cost = $600,000
Total cost = Variable cost per unit x Number of units + Fixed cost
Total cost = $20 x 60,000 + $600,000
Total cost = $1,800,000
Unit cost = Total cost / Number of units
Unit cost = $1,800,000 / 60,000
Unit cost = $30
Therefore, the unit cost for each mixer-grinder would be $30. Option B is the best choice.

Question 10

Which of the following would be a part of the variable costs for a firm?

Accepted Answer

Variable costs are costs that change with the level of production or sales. Product packaging materials are directly related to the production of goods and are considered variable costs.

Answer: None of the other choices
 Interest on debt is a fixed cost as it does not change with the level of production. Executive salaries and rent on buildings are both fixed costs as they do not directly vary with the production.

Question 11

A hotel in Hawaii charges its hotel guests premium prices for food at its in-house restaurant.As the guests are unaware of lower-priced restaurants in the area,they are often seen to be less price-sensitive than the locals.Which of the factors that affect customers' sensitivity to pricebest explains the lower price-sensitivity of outsiders?

Accepted Answer

The lower price-sensitivity of outsiders (hotel guests) is best explained by the substitute-awareness effect. This effect occurs because the guests are not aware of alternative dining options in the area that may offer lower prices, making them less sensitive to the higher prices charged by the hotel's in-house restaurant.

Question 12

Suppose that General Motors Corporation prices its new automobiles in such a manner that it would achieve a 15 percent return on its investment in these automobiles.Which of the following pricing policies is the company using?

Accepted Answer

General Motors Corporation is using target-return pricing, as they are pricing their new automobiles to achieve a specific return on investment (in this case, 15 percent). A) Odd pricing refers to setting prices slightly below a round number (e.g. $9.99 instead of $10.00) to create a perception of a lower price. B) Price lining involves offering different products at different price points (e.g. a basic model, a mid-level model, and a high-end model). C) Functional pricing involves setting prices based on the product's functions or features.

Question 13

The fixed cost per unit of a product:

Accepted Answer

Fixed cost per unit declines as production volume increases because the total fixed costs are spread over more units, reducing the cost per unit.

Question 14

A firm has unit costs of $10 per unit.The investment in capital for the production of the product is $2 million,expected unit sales are 100,000 units,and a desired rate of return on their investment is15%.Calculate the return price.

Accepted Answer

The return price is calculated as follows:Return price = Unit costs + (Investment in capital * Desired rate of return) / Expected unit salesReturn price = $10 + ($2 million * 15%) / 100,000 unitsReturn price = $10 + $300,000 / 100,000 unitsReturn price = $10 + $3Return price = $13

Question 15

The break-even volume for a product is 10,000 units,the fixed cost is $10,000,and variable cost is $1 per unit.What is the required selling price per unit?

Accepted Answer

The break-even point is where total costs equal total revenue. The formula to calculate the break-even point in units is Fixed Costs / (Selling Price per Unit - Variable Cost per Unit). Given a break-even volume of 10,000 units, fixed costs of $10,000, and a variable cost of $1 per unit, we can rearrange the formula to solve for the selling price per unit: $10,000 / 10,000 units + $1 = $2.00.

Question 16

James has invested in a health insurance plan that pays for half of his medical expenses.He is not very price-sensitive and does not hesitate to opt for expensive medial treatments.This is an example of the _____ effect.

Accepted Answer

This is an example of the shared-cost effect, where the individual is less price-sensitive as the cost of the medical treatment is partially covered by the insurance plan. The individual is less concerned about the total cost and more likely to opt for expensive treatments.

Question 17

The _____ of a product varies in magnitude directly with the production,but remains constant per unit regardless of how many units are produced.

Accepted Answer

This is referring to the concept of variable cost, which increases proportionally with the level of production but remains constant per unit. Fixed cost per unit, total cost, and average cost do not exhibit this characteristic.

Question 18

What is the unit cost of a product if the firm expects to sell 100,000 units,fixed costs being $1 million,and variable cost per unit being $20?

Accepted Answer

The unit cost of a product is calculated by adding the variable cost per unit to the fixed cost per unit. The fixed cost per unit is the total fixed costs divided by the number of units expected to be sold. In this case, the fixed cost per unit is $1,000,000 / 100,000 = $10. Adding the variable cost per unit of $20 to this gives a total unit cost of $30.

Question 19

Which of the following would be a part of the fixed costs of a firm?

Accepted Answer

Fixed costs are costs that do not vary with the level of output or sales. Executive salaries are a fixed cost as they remain constant regardless of production levels. Product packaging materials and material costs are variable costs as they are directly proportional to the level of production. Labor required to produce a unit of the product is a direct cost, which may be either fixed or variable depending on the employment contracts, but it is not a fixed cost for sure.

Question 20

The unit cost of a product is $10.$2 million is invested in capital for the production of the product,and the expected sales are 100,000 units.How much would the target return price change if the desired rate of return on the investment is raised from 15% to 20%?

Accepted Answer

Initially, the desired return on investment (ROI) is 15% of $2 million, which is $300,000. With a 20% ROI, the desired return becomes $400,000. The difference is $100,000. Spread over 100,000 units, this increases the target return price by $1 per unit.

Quiz 11: Pricing Decisions