Exam 18: Price Setting in the Business World

A certain item has a production cost of $24. The manufacturer takes a 25 percent markup, the wholesaler takes a 20 percent markup, and the retailer takes a 50 percent markup. Therefore, the item has a retail selling price of $80.

According to the text, the two basic approaches to price setting are

Total fixed cost

Some retailers feel that their potential customers find certain prices appealing, but between these prices the customers see prices as roughly the same--and thus price cuts within these ranges will not increase the quantity sold (i.e., the demand curve is vertical within these "same price" ranges). These retailers probably use ______________ if they want to maximize profit.

Which of the following observations is false?

Each possible price has its own break-even point.

If a profit-oriented marketing manager doesn't know the exact shape of the firm's demand curve, marginal analysis:

When AT&T attracts residential customers by setting one monthly fee for high-speed Internet, cable TV, and long-distance phone services that is $40 less than the price of purchasing these three services separately, this is an example of:

Which of the following costs do not change with an increase in output?

Average-cost pricing:

A publisher needed one of its best-selling authors to fly from his home in Richmond, Virginia to Chicago, Illinois in order to start a publicity campaign for the author's new book. The author could have taken a flight to Detroit, Michigan, changed planes, and then flew on to Chicago for about half the price of a non-stop flight from Richmond to Chicago. However, he chose the non-stop flight. He became less price sensitive because of:

A major difference between leader pricing and bait pricing is that bait pricing is criticized as unethical while leader pricing is not.

A typical break-even analysis assumes that:

Best Buy sets its prices below other electronics stores in its service area and generally attracts more customers than the others. Best Buy apparently hopes to earn a profit by

A price leader can only set prices in markets that aren't very competitive.

Which of the following would NOT be included in a firm's total variable cost?

Average-cost pricing guarantees that the firm will earn enough to at least cover its costs.

If a retailer adds a 25-cent markup to a product which costs the retailer $1.00, then according to the text the retailer's markup is 20 percent.

Use this information for questions that refer to the Sporting Products, Inc. (SPI) case. Randy Todd, marketing manager for Sporting Products, Inc. (SPI), is thinking about how changes taking place among retailers in his channel might impact his strategy. SPI sells the products it produces through wholesalers and retailers. For example, SPI sells basketballs to Wholesale Supply for $8.00. Wholesale Supply uses a 20 percent markup and most of its "sport shop" retailer customers, like Robinson's Sporting Goods, use a 33 percent markup to arrive at the price they charge final consumers. However, one fast growing retail chain, Sports Depot, only uses a 20 percent markup for basketballs, even though it pays Wholesale Supply the same price as other retailers. Furthermore, Sports Depot occasionally lowers the price of basketballs and sells them at cost--to draw customers into its stores and stimulate sales of its pricey basketball shoes. Sports Depot is also using other pricing approaches that are different from the sports shops that usually handle SPI products. For example, Sports Depot prices all of its baseball gloves at $20, $40, or $60--with no prices in between. There are three big bins - one for each price point. Todd is also curious about how Sports Depot's new strategy to increase sales of tennis balls will work out. The basic idea is to sell tennis balls in large quantities to nonprofit groups who resell the balls to raise money. For example, a service organization at a local college bought 2,000 tennis balls printed with the college logo. Sports Depot charged $.50 each for the tennis balls-plus a $500 one-time charge for the stamp to print the logo. The service group plans to resell the tennis balls for $2.50 each and contribute the profits to a shelter for the homeless. Todd is not certain if Sports Depot ideas will affect SPI's plans. For example, SPI is considering adding tennis racquets to the lines it produces. This would require a $500,000 addition to its factory as well as the purchase of new equipment that costs $1,000,000. The variable cost to produce a tennis racquet would be $20, but Todd thinks that SPI could sell the racquet at a wholesale price of $40 each. That would allow most retailers to add their normal markup and make a profit. However, if Sports Depot sells the racquet at a lower than normal price other retailers might decide to carry it. -When Sports Depot temporarily lowers the price of basketballs, it is using:

Which of the following observations concerning a "reference price" is true?