Question 1

One problem in relying on price elasticity and demand curves when setting prices is
A) the way a product or service is marketed can have a profound impact on price elasticity.
B) the underlying ideas of the demand curve and elasticity are less relevant in the modern economy.
C) only economists can properly analyze demand curves and set prices using this tool.
D) competitors can construct the same demand curves, so there is no advantage in using them.
E) marketing split from economics over the ideas of demand and elasticity.

Accepted Answer

The way a product or service is marketed can have a profound impact on price elasticity. For example, a luxury brand may be able to charge a higher price due to brand image and perception, even if a similar product is available at a lower price. Similarly, promotional activities like discounts and sales can also impact price elasticity. Therefore, relying solely on price elasticity and demand curves may not lead to accurate pricing decisions.

Question 2

The Coffee Express company is located in a business district with few customers on the weekend.To attract customers on Saturday and Sundays,it reduces its prices on these two days.This is an example of
A) dynamic pricing.
B) the substitution effect.
C) the income effect.
D) the target return effect.
E) cross-price elasticity.

Accepted Answer

The Coffee Express company is using dynamic pricing by reducing its prices on the weekend to attract customers. Dynamic pricing is the strategy of adjusting prices in real-time in response to demand in order to maximize revenue or profit. In this case, Coffee Express is trying to increase its revenue by reducing prices on the weekend when demand is low.

Question 3

Managers of Wendy's fast-food restaurants keep track of prices at competitors such as McDonald's,Burger King,and Arby's,knowing that a decrease in the prices at these other fast-food restaurants will
A) increase the income effect for Wendy's products.
B) increase demand for Wendy's products.
C) decrease the income effect for Wendy's products.
D) increase the complementary effect for Wendy's products.
E) decrease demand for Wendy's products.

Accepted Answer

A decrease in prices at competitors like McDonald's, Burger King, and Arby's would make those options more attractive to consumers, potentially leading to a decrease in demand for Wendy's products as customers may choose the cheaper alternatives.

Question 4

There are many options available to consumers when it comes to breakfast cereals.So,if Kellogg's significantly increases the price of Rice Krispies,consumers are more apt to buy alternate cereals instead.This illustrates which concept?
A) the income effect
B) the substitution effect
C) the break-even point
D) the target return effect
E) cross-price elasticity

Accepted Answer

The situation described in the question illustrates the substitution effect, which refers to consumers switching to alternatives when the price of a particular product increases. In this case, if Kellogg's increases the price of Rice Krispies, consumers will likely buy other cereal brands instead, indicating a substitution effect. The other options listed do not apply to this scenario. The income effect refers to changes in buying habits due to changes in income; the break-even point is the level of sales required to cover all costs and generate a profit; the target return effect is the goal of achieving a specific profit margin; and cross-price elasticity refers to the responsiveness of demand for one product to changes in the price of another related product.

Question 5

French luxury goods manufacturer and retailer Hermès is known for making expensive leather goods.But paying $300,168 for a handbag at auction,which is over the standard retail price of $280,000,is extraordinary,and not for the casual shopper.The handbag is considered a
A) product in demand.
B) inelastic product.
C) elastic product.
D) custom product.
E) prestige product.

Accepted Answer

The fact that a handbag is being sold for over the standard retail price of $280,000 indicates that it is a highly prestigious product. Hermès is a luxury brand that is known for making expensive leather goods, which suggests that their products are considered to be exclusive and highly prestigious. Therefore, the handbag is considered a prestige product.

Question 6

Marketers spend millions of dollars annually trying to create or reinforce brand loyalty.Brand loyalty changes the demand curve for the firm's products by
A) reducing the price elasticity of demand.
B) making demand more oligopolistic and less monopolistic.
C) increasing the income effect.
D) reducing fixed costs and increasing the gray marketing effect.
E) shifting the market from a monopoly to pure competition.

Accepted Answer

Brand loyalty reduces the price elasticity of demand, meaning that consumers are less sensitive to changes in price and are more willing to pay a premium for a specific brand. This results in a shift in the demand curve for the firm's products, as consumers who are loyal to the brand are willing to purchase the product at a higher price than they would for a competing product.

Question 7

Frank's Heating and Air Conditioning Company specializes in electric heat pumps.Frank keeps track of the price of natural gas,knowing that
A) natural gas creates more environmental greenhouse effects than coal.
B) an increase in the price of natural gas will increase demand for his electrical heating systems.
C) gas heating systems and electrical heating systems are complementary goods.
D) when the price of natural gas goes up, the quantity demanded also rises.
E) the demand for natural gas is price elastic.

Accepted Answer

Frank's company specializes in electric heat pumps, which are a substitute for gas heating systems. When the price of natural gas increases, the demand for electric heat pumps is likely to increase as people look for more affordable and environmentally friendly alternatives. Therefore, an increase in the price of natural gas will increase demand for his electrical heating systems.

Question 8

Sales of national brands of orange juice tend to increase when the economy is doing well,while sales of generic orange juice increase when the economy is not doing well.This is an example of how _______ impacts demand for products.
A) dynamic pricing
B) the price inelasticity coefficient
C) the income effect
D) the target return effect
E) cross-price elasticity

Accepted Answer

The scenario described is an example of the income effect, where changes in consumers' income levels impact the demand for different types of orange juice. When the economy is doing well, consumers have more disposable income and are more likely to purchase higher-priced national brands. Conversely, when the economy is not doing well, consumers have less disposable income and are more likely to purchase lower-priced generic alternatives. This phenomenon is often observed across a variety of product categories.

Question 9

Which of the following is the most logical example of complementary products?
A) hot dogs and hamburgers
B) VCRs and DVD players
C) hot dogs and hot dog buns
D) Honda cars and Toyota cars
E) a university and a corporation

Accepted Answer

Complementary products are products that are used together, such as hot dogs and hot dog buns. The other options do not fit the definition of complementary products. A) hot dogs and hamburgers are both meal options but not necessarily used together. B) VCRs and DVD players are both technologies for watching movies but not used together. D) Honda cars and Toyota cars are both car brands but not used together. E) a university and a corporation are not products and not used together in this context.

Question 10

Consider a bakery like Entenmann's: The majority of the ___________ costs are the cost of the ingredients,primarily flour.
A) fixed
B) incidental
C) prestige
D) inelastic
E) variable

Accepted Answer

Variable costs are costs that vary with the level of production, such as the cost of ingredients for a bakery. The cost of flour is directly tied to the amount of baked goods produced, making it a variable cost. Fixed costs are expenses that do not change with the level of production, such as rent or salaries. Incidental costs are unexpected expenses that may arise but are not an essential part of the production process. Prestige costs are related to the reputation or image of a product, and inelastic costs are expenses that do not change with fluctuations in demand.

Question 11

David manages a Shoney's restaurant.He is considering staying open later in the evening.For David,the variable costs associated with staying open longer hours will include all of the following except
A) ingredients used in preparing food.
B) hours worked by cooks.
C) rent on the restaurant building.
D) energy costs.
E) hours worked by the servers.

Accepted Answer

Rent on the restaurant building is a fixed cost and does not change based on the number of hours the restaurant is open. Therefore, it is not a variable cost associated with staying open later in the evening.

Question 12

The observation that consumers are generally more sensitive to price increases than to price decreases suggests that
A) most consumers cannot remember what price they paid the last time they bought a particular product.
B) it is easier to lose customers with a price increase than to gain customers with a price decrease.
C) most consumers would rather skip buying a product than pay a higher price.
D) most consumers are emotionally attached to their favorite products and are unlikely to change, even if the price changes.
E) firms gain more customers with price decreases than they lose with price increases.

Accepted Answer

The observation implies that customers are more likely to switch to a competitor or forego a purchase altogether in response to a price increase, suggesting that losing customers with a price increase is easier than gaining customers with a price decrease.

Question 13

Brad always buys and uses Nike brand golf balls.If he finds a Titleist or Callaway ball in the rough,he gives it away.Brand-loyal golfers like Brad allow Nike to charge a higher price and not lose many sales.By building a strong brand,Nike has effectively
A) increased the income effect for its products.
B) increased the cross-price elasticity for its products.
C) focused on the competitive parity point for its products.
D) shifted the golf ball market from a monopoly to pure competition.
E) reduced the price elasticity of demand for its products.

Accepted Answer

Brand-loyal customers like Brad are less sensitive to changes in price and therefore have a lower price elasticity of demand. By building a strong brand, Nike has reduced the price elasticity of demand for its products, allowing them to charge a higher price without losing many sales.

Question 14

Rodi owns Hallman's auto repair service.He has observed over the years that customers keep their high-mileage cars longer when the economy is doing poorly,creating demand for his maintenance and repair service.Rodi has observed the impact of _______ on demand for his service.
A) break-even points
B) the price inelasticity ratio
C) the income effect
D) the target return effect
E) cross-price elasticity

Accepted Answer

Rodi observed that during a poor economy, customers keep their high-mileage cars longer. This suggests that their income may be constrained, leading to an income effect where they prioritize repairs over purchasing a new car.

Question 15

The more substitutes that exist in a market,
A) the lower the price elasticity for each product.
B) the greater the income elasticity for each product.
C) the easier it will be to utilize a target profit pricing strategy.
D) the more sensitive consumers will be to changes in the price of a particular product.
E) the more likely the market will be characterized as an oligopoly.

Accepted Answer

When there are more substitutes available in the market, consumers have more options to choose from, making them more sensitive to changes in the price of a particular product. This increases price elasticity, which means that even a small change in price can lead to a significant change in demand. Therefore, option D is the correct choice.

Question 16

Bill is a yacht broker in the southeastern United States.For years he has had difficulty selling large yachts locally because there were few places to dock these boats.Yachts and spaces to dock them are an example of
A) substitute products.
B) purely competitive products.
C) status quo pricing products.
D) complementary products.
E) competitive parity products.

Accepted Answer

Complementary products are those that are purchased or used together. In this case, the yachts and spaces to dock them are complementary products, as without a place to dock the yacht, it is not very useful. Bill's difficulty in selling large yachts is due to the lack of availability of complementary products (i.e. places to dock them), not due to competition or pricing issues, hence options B and C are incorrect. Similarly, there does not seem to be any substitute product for yachts or for spaces to dock them, so option A is also incorrect. Competitive parity products (option E) are products that are perceived by customers as being of similar quality and value from different providers, but this does not seem to be relevant in this scenario.

Question 17

Natalie operates on a pretty tight budget.She is a price-conscious shopper and usually buys store or generic brands to save money.Recently,however,Natalie was given a pretty substantial raise.As such,she has altered her shopping patterns and now regularly buys more expensive,name-brand goods.This is an example of
A) the substitution effect.
B) the price inelasticity coefficient.
C) the income effect.
D) the target return effect.
E) cross-price elasticity.

Accepted Answer

The scenario described is an example of the income effect. When Natalie's income increased, she was able to shift her consumption towards more expensive, name-brand goods, indicating that she had more purchasing power. The substitution effect would occur if Natalie shifted her consumption to cheaper alternatives despite the increase in income. The price inelasticity coefficient, target return effect, and cross-price elasticity are not applicable to this scenario.

Question 18

If the price for a product increases,the demand for the complementary product will
A) decrease.
B) increase.
C) stay the same.
D) become more elastic.
E) become more inelastic.

Accepted Answer

The price increase of a product will result in a decrease in demand for its complementary product. This is because the increase in price makes it less affordable for consumers to purchase both products together, leading to a decrease in demand for the complementary product.

Question 19

In general,prices should not be based on costs because
A) consumers are cost-conscious.
B) producers rarely know what their costs are.
C) consumers make their purchase decisions based on perceived value.
D) producers need to avoid creating a cost competitive parity debate.
E) customers are always right.

Accepted Answer

Prices should be based on the perceived value of the product or service to the customer, rather than just the cost of producing it. Consumers make their purchase decisions based on the perceived value they receive from the product, not solely on its cost. Therefore, pricing based on cost alone may not accurately reflect the true value of the product to the customer and may lead to the loss of potential sales.

Question 20

_______ products are products whose demands are positively related and as such,they rise or fall together.
A) Substitute
B) Premium
C) Elastic
D) Inelastic
E) Complementary

Accepted Answer

Complementary products are products whose demands are positively related. For example, if the demand for hot dogs goes up, the demand for hot dog buns also goes up, and vice versa. They are deemed complementary because they are often used or consumed together.

Quiz 14: Pricing Concepts for Establishing Value

One problem in relying on price elasticity and demand curves when setting prices is

The Coffee Express company is located in a business district with few customers on the weekend.To attract customers on Saturday and Sundays,it reduces its prices on these two days.This is an example of

Managers of Wendy's fast-food restaurants keep track of prices at competitors such as McDonald's,Burger King,and Arby's,knowing that a decrease in the prices at these other fast-food restaurants will

There are many options available to consumers when it comes to breakfast cereals.So,if Kellogg's significantly increases the price of Rice Krispies,consumers are more apt to buy alternate cereals instead.This illustrates which concept?

French luxury goods manufacturer and retailer Hermès is known for making expensive leather goods.But paying $300,168 for a handbag at auction,which is over the standard retail price of $280,000,is extraordinary,and not for the casual shopper.The handbag is considered a

Marketers spend millions of dollars annually trying to create or reinforce brand loyalty.Brand loyalty changes the demand curve for the firm's products by

Frank's Heating and Air Conditioning Company specializes in electric heat pumps.Frank keeps track of the price of natural gas,knowing that

Sales of national brands of orange juice tend to increase when the economy is doing well,while sales of generic orange juice increase when the economy is not doing well.This is an example of how _______ impacts demand for products.

Which of the following is the most logical example of complementary products?

Consider a bakery like Entenmann's: The majority of the ___________ costs are the cost of the ingredients,primarily flour.

David manages a Shoney's restaurant.He is considering staying open later in the evening.For David,the variable costs associated with staying open longer hours will include all of the following except

The observation that consumers are generally more sensitive to price increases than to price decreases suggests that

Brad always buys and uses Nike brand golf balls.If he finds a Titleist or Callaway ball in the rough,he gives it away.Brand-loyal golfers like Brad allow Nike to charge a higher price and not lose many sales.By building a strong brand,Nike has effectively

Rodi owns Hallman's auto repair service.He has observed over the years that customers keep their high-mileage cars longer when the economy is doing poorly,creating demand for his maintenance and repair service.Rodi has observed the impact of _______ on demand for his service.

The more substitutes that exist in a market,

Bill is a yacht broker in the southeastern United States.For years he has had difficulty selling large yachts locally because there were few places to dock these boats.Yachts and spaces to dock them are an example of

If the price for a product increases,the demand for the complementary product will

In general,prices should not be based on costs because

_______ products are products whose demands are positively related and as such,they rise or fall together.