Question 1

Changes in total cost depend on variations in total variable cost, since total fixed cost stays the same.

Accepted Answer

Total fixed cost remains constant regardless of changes in production levels, so it does not affect changes in total cost. Total variable cost, on the other hand, does change with production levels and therefore affects changes in total cost.

Question 2

If a manager sells more than was expected when average-cost pricing was used to set a price, the firm will lose money.

Accepted Answer

With average-cost pricing, the price is set by adding a markup to the average cost of producing a product. If the manager is able to sell the product for more than the expected price, this means that the actual selling price is higher than the average cost. Therefore, the firm will make a profit rather than lose money.

Question 3

Break-even analysis evaluates whether the firm will be able to cover all its costs with a particular price.

Accepted Answer

Break-even analysis is a tool that helps businesses determine the point at which their revenue will cover their costs. By identifying this point, businesses can determine the price at which they need to sell their products or services in order to make a profit. Therefore, break-even analysis evaluates whether the firm will be able to cover all its costs with a particular price.

Question 4

Total fixed costs do not change when output increases.

Accepted Answer

Total fixed costs remain constant regardless of changes in output levels.

Question 5

Even if a firm's average variable cost remains constant per unit, its average cost will increase as output increases.

Accepted Answer

If the firm's average variable cost remains constant per unit, and fixed costs are spread over a larger number of units, the average cost will decrease as output increases.

Question 6

When setting prices, the marketing manager should consider the firm's demand curve, or else the price may not even cover the firm's total cost.

Accepted Answer

The demand curve shows how much of a product consumers are willing to buy at different prices, and it is important for the marketing manager to consider this when setting prices. If the price is set too high, demand may decrease and the firm may not be able to sell enough to cover its total cost. If the price is set too low, the firm may sell enough units, but the revenue may not cover the total cost. By setting prices based on the demand curve, the firm can find the optimal price that maximizes profit.

Question 7

An advantage of average-cost pricing is that it considers competitors' costs and prices.

Accepted Answer

Average-cost pricing does not consider competitors' costs and prices. It only takes into account the costs of production and desired profit margin in determining the price of a product or service.

Question 8

Average fixed costs are lower when a large quantity is produced.

Accepted Answer

This is because fixed costs are spread out over a larger quantity, resulting in each unit bearing a smaller portion of the fixed costs.

Question 9

A major advantage of average-cost pricing is that it assumes costs remain constant at different levels of output.

Accepted Answer

Average-cost pricing does not assume costs remain constant at different levels of output; it calculates the cost per unit by dividing total costs by the number of units produced, which can vary with different levels of output.

Question 10

Average-cost pricing works well if the firm actually sells the quantity which was used in setting the price, but losses may result if actual sales are much higher than were expected--due to higher total variable costs.

Accepted Answer

Average-cost pricing can lead to losses if actual sales are much lower than expected, not higher. If actual sales are higher than expected, the firm may make more profit due to economies of scale.

Question 11

Ignoring demand is the major weakness of average-cost pricing

Accepted Answer

Average-cost pricing does not take into account the demand for a product, which can lead to problems such as underpricing or overpricing. As a result, it can be a weakness of this pricing strategy.

Question 12

Average-cost pricing works best in situations where demand conditions do not change a lot.

Accepted Answer

Average-cost pricing is based on setting the price of a product or service at a level that covers the average cost of production, plus a reasonable profit margin. This strategy is most effective when demand conditions are stable and predictable, as it allows the firm to achieve a steady rate of return and avoid pricing shocks that could harm profitability. In situations where demand is highly variable, however, average-cost pricing may result in either overpricing or underpricing, leading to lost sales or reduced profits.

Question 13

In target return pricing, the desired target return is added to total cost; otherwise, it's the same as average-cost pricing.

Accepted Answer

In target return pricing, the desired target return is added to total cost, which is not the same as average-cost pricing where the desired profit margin is added to the unit cost.

Question 14

A firm's average fixed cost increases as its output increases.

Accepted Answer

Average fixed cost is calculated by dividing total fixed cost by the quantity of output. Since fixed cost remains constant regardless of the level of output, the average fixed cost will decrease as output increases.

Question 15

At zero output, total variable cost is zero.

Accepted Answer

This is because at zero output, no variable inputs are being used, thus no variable costs are incurred. However, there may still be fixed costs that need to be covered.

Question 16

A firm's total cost increases only when its variable cost increases.

Accepted Answer

The answer of A firm's total cost increases only when...

Question 17

As output increases, a firm's average fixed cost probably will go down.

Accepted Answer

Average fixed cost is total fixed cost divided by the quantity produced. As output increases, the fixed cost is spread over a larger quantity of output, leading to a decrease in the average fixed cost.

Question 18

If a firm's average variable cost is constant per unit, then the firm's average cost decreases continually as output increases because average fixed cost decreases continually.

Accepted Answer

When average variable cost is constant, the only factor that can change average total cost as output increases is the average fixed cost, which spreads over more units, thus decreasing continually.

Question 19

Average fixed cost goes down as output decreases.

Accepted Answer

Average fixed cost (AFC) is calculated by dividing total fixed cost (TFC) by the quantity produced (Q). As output decreases, the quantity produced (Q) gets smaller, but the total fixed cost (TFC) remains the same. Therefore, the AFC increases as output decreases.

Question 20

Target return pricing is a variation of average-cost pricing--and has the same basic weakness as other average-cost methods.

Accepted Answer

Target return pricing, like other average-cost methods, assumes that costs are linear and can be allocated evenly across all units produced. However, this may not accurately reflect the true costs of producing each unit, leading to potentially misleading pricing decisions.

Quiz 18: Price Setting in the Business World