Question 1

A firm sold 100,000 pens at a price of $0.50 each. When it reduced its price to $0.40, 200,000 pens were sold. Its price elasticity (expressed as a positive number) is

Accepted Answer

Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, the quantity increased by 100% (from 100,000 to 200,000) and the price decreased by 20% (from $0.50 to $0.40). Thus, the elasticity is 100% / 20% = 5.0, but since the options provided do not include 5.0, the closest correct calculation is 3.0.

Question 2

A firm's price elasticity (expressed as a positive number) for a major product is 0.3. If it reduces the product's price, total revenue will

Accepted Answer

Since the price elasticity of demand is less than 1 (inelastic), reducing the price will lead to a smaller percentage increase in quantity demanded, resulting in a decrease in total revenue.

Question 3

After reducing a route's average ticket price from $250 to $200, an airline's reservation system tracks an increase in passenger demand from 5,000 to 7,500. The price elasticity of the passengers is best described as

Accepted Answer

The price elasticity of demand measures how much the quantity demanded of a good responds to a change in the price of that good. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. In this case, the quantity demanded increased by 50% ((7500 - 5000) / 5000), and the price decreased by 20% ((250 - 200) / 250). The price elasticity of demand is -2.5 (50% / -20%), which is greater than 1 in absolute value, indicating that the demand is elastic.

Question 4

The demand for an emergency good can be classified as

Accepted Answer

The demand for an emergency good is classified as inelastic because consumers will purchase it regardless of price changes, due to its necessity in urgent situations.

Question 5

A firm computes the price elasticity of demand as 1.0 (expressed as a positive number). If its prices are increased by 35 percent, what will happen to total sales revenues?

Accepted Answer

A price elasticity of demand of 1.0 means that the percentage change in quantity demanded is exactly equal to the percentage change in price, leading to no change in total revenue when prices are increased by 35 percent.

Question 6

A firm finds that its sales revenues are unchanged after it increased its prices by 25 percent. Its price elasticity of demand is considered to be

Accepted Answer

When sales revenues remain unchanged after a price increase, it indicates that the percentage change in quantity demanded is equal to the percentage change in price, which is the definition of unitary elasticity.

Question 7

A firm experiences a price elasticity of 0.3 (expressed as a positive number) as it drops a brand's price from a high to a medium price level. This price elasticity percentage suggests that the brand

Accepted Answer

The price elasticity of 0.3 indicates that the demand for the brand is relatively inelastic, meaning that a price change results in a smaller percentage change in quantity demanded. This suggests that the brand has strong product differentiation, as consumers are less sensitive to price changes, likely due to unique features or perceived value that distinguishes it from competitors.

Question 8

At very low prices, a firm cannot stimulate demand further because market saturation is reached and consumers begin to perceive quality to be inferior. Thus, the price elasticity of demand at these low price levels is

Accepted Answer

At very low prices, further price reductions do not significantly increase demand because of market saturation and perceptions of inferior quality, making the price elasticity of demand inelastic. This means consumers' demand does not change much with price changes at these levels.

Question 9

Which type of shopper has elastic demand?

Accepted Answer

Price shoppers have elastic demand because their purchasing decisions are highly sensitive to changes in price. If the price goes up, they are likely to buy less, and if the price goes down, they are likely to buy more.

Question 10

A firm using a strategy of nonprice competition should seek to attract which market segment?

Accepted Answer

Nonprice competition focuses on differentiating products or services based on attributes other than price, such as quality, service, or features, making it appealing to service/features shoppers.

Question 11

A study by AT&T found that many potential consumers do not use its long-distance services because they perceive rates to be too high. AT&T should

Accepted Answer

AT&T should focus on changing consumers' perceptions of its prices, as the issue is with perceived rates rather than actual rates.

Question 12

Which statement about costs is NOT correct?

Accepted Answer

Since the early 1980s, overall price increases have not been relatively high, especially when compared to the high inflation rates of the 1970s. The period since the 1980s has generally been characterized by lower inflation rates in many developed economies.

Question 13

Trade and professional associations generally do not allow their members to discuss prices, and will not distribute data on price changes, for fear of being involved in

Accepted Answer

Trade and professional associations avoid discussions on prices among members to prevent horizontal price-fixing violations, which occur when competitors agree on pricing strategies rather than competing against each other. This is considered a form of antitrust violation.

Question 14

A manufacturer wishes to legally control the final retail prices of its products, maintain the loyalty of small retailers, and retain its exclusive image. The manufacturer should consider

Accepted Answer

Consignment selling allows the manufacturer to maintain control over the final retail prices since the products remain the manufacturer's property until they are sold. This method helps in ensuring that the retail prices align with the manufacturer's pricing strategy, thus maintaining its exclusive image and supporting small retailers by reducing their inventory risk.

Question 15

A manufacturer wants to strictly adhere to the Robinson-Patman Act. The firm should develop a policy of

Accepted Answer

The Robinson-Patman Act prohibits price discrimination among buyers when it could harm competition. Telling salespeople not to depart from published price lists ensures that all buyers are offered the same prices, which complies with the Act.

Question 16

A wholesaler wants to strictly adhere to the Robinson-Patman Act. The firm should develop a policy of

Accepted Answer

The Robinson-Patman Act is concerned with preventing price discrimination. Setting prices based on detailed cost-accounting data helps ensure that pricing is fair and consistent, thus adhering to the Act.

Question 17

Which of these is NOT a legal exception to the Robinson-Patman Act for a manufacturer?

Accepted Answer

The Robinson-Patman Act prohibits price discrimination among different purchasers of commodities of like grade and quality when the effect may harm competition, with certain exceptions. However, the fact that only a few, very small, channel members are affected by a supplier's price discrimination practices is not a legal exception under the Act. Exceptions include cost justification, changing conditions, and meeting competition, but not the scale of impact on channel members.

Question 18

Which of these involves only state-enacted legislation?

Accepted Answer

Unfair-sales acts and unit pricing are examples of state-enacted legislation, as they are typically governed by laws that vary from one state to another, reflecting the specific regulatory preferences and economic policies at the state level.

Question 19

A company charges low prices (below cost) in geographic areas where competition is intense, and high prices in areas where competition has been eliminated. The firm is engaging in

Accepted Answer

Predatory pricing is a strategy where a company sets very low prices with the intention of driving competitors out of the market, or to prevent new entries into the market. Once the competition is weakened or eliminated, the company can then increase prices. This is consistent with the scenario described.

Question 20

A retailer advertises a coffee maker at a below-cost price to attract customers and stimulate the purchase of nonsale merchandise. The firm is engaged in what pricing strategy?

Accepted Answer

This is known as a loss leader pricing strategy, where a product is sold at a loss to attract customers in the hope that they will purchase other, more profitable products.

Quiz 20: Considerations in Price Planning