Question 1

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 2

If the price per unit is $1.00 and the average variable cost per unit is 60 cents, the fixed cost contribution per unit is $1.40.

Accepted Answer

The fixed cost contribution per unit would be 40 cents ($1 - $0.60 = $0.40), not $1.40.

Question 3

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

Accepted Answer

Average-cost pricing is based on the average cost of production and does not consider competitors' costs and prices.

Question 4

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, then its average cost will also remain constant per unit. Therefore, the average cost will not increase as output increases.

Question 5

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 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 the relationship between price and quantity demanded, and setting a price above what the market is willing to pay may result in lower sales and revenue that do not cover the firm's total cost. Thus, it is important for the marketing manager to consider the demand curve when setting prices.

Question 7

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

Accepted Answer

This statement is true. Total cost is the sum of fixed cost and variable cost. As fixed cost remains constant, changes in total cost will depend on variations in variable cost.

Question 8

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

Accepted Answer

Total cost is the sum of fixed cost and variable cost. Fixed cost does not change with the level of output. Therefore, total cost increases only when variable cost increases.

Question 9

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

Accepted Answer

Average-cost pricing is based on the assumption that the company will sell enough units to cover its costs and make a reasonable profit. This approach works best when demand conditions are stable, and the company can accurately predict how many units it will sell at a given price. If demand conditions are volatile, the company may have trouble setting a price that covers its costs and generates a profit, as price changes may not result in the expected changes in demand.

Question 10

Ignoring demand is the major weakness of average-cost pricing.

Accepted Answer

Average-cost pricing is a pricing strategy that involves setting the price of a product based on its average cost of production. The major weakness of this strategy is that it ignores demand for the product, which can result in setting a price that is too high or too low relative to what customers are willing to pay. This can lead to lost sales and reduced profits.

Question 11

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

Average-cost pricing may result in a higher profit margin if the manager sells more than expected due to the lower per-unit cost. However, if the sales are much higher than expected, it may signal that the price was set too low and the firm could potentially make even higher profits by increasing the price. Therefore, the firm would not necessarily lose money.

Question 12

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

Accepted Answer

Average fixed cost is fixed and does not change with changes in output. It is only the average variable cost and total cost that changes with changing levels of output.

Question 13

Total fixed costs do not change when output increases.

Accepted Answer

Total fixed costs are fixed and do not change with changes in output or production level.

Question 14

Average fixed cost goes down as output decreases.

Accepted Answer

Average fixed cost is calculated by dividing total fixed costs by the quantity of output. As the quantity of output decreases, the fixed costs are spread over a smaller quantity, causing the average fixed cost to increase.

Question 15

The break-even point is the intersection of the total cost curve and the total profit curve.

Accepted Answer

The break-even point is the intersection of the total cost curve and the total revenue curve, not the total profit curve. Profit is calculated by subtracting total costs from total revenue.

Question 16

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 is based on setting the price for a product or service at a level that covers the average total cost of producing it. This strategy assumes that the firm will sell the expected quantity of units at the set price. However, if actual sales are much higher than expected, due to increased demand or other factors, the firm may face higher total variable costs, which could lead to lower profits or even losses. Therefore, average-cost pricing may not always be the best pricing strategy, especially in volatile or unpredictable markets.

Question 17

At zero output, total variable cost is zero.

Accepted Answer

This is because total variable cost includes only variable costs such as labor and materials, which are not incurred when there is zero output.

Question 18

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

Accepted Answer

Average fixed costs are fixed expenses divided by the quantity produced. As the quantity produced increases, the fixed expenses are spread out over a larger quantity, resulting in a lower average fixed cost.

Question 19

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 method of determining the minimum level of sales required for a firm to cover all its costs with a particular price, and therefore not incur losses.

Question 20

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

Accepted Answer

As output increases, the fixed costs are spread over more units of production, thereby decreasing the average fixed cost per unit.

Quiz 17: Price Setting in the Business World