Exam 18: Price Setting in the Business World

The manager of Hot Topics Fashion Shop has concluded that her customers find certain prices very appealing. Customers see prices above or below these levels as roughly equal--and price cuts in these ranges don't increase sales. This seems to call for

When customers have to pay the bill themselves, they are likely to be more price sensitive.

Even if a manager's estimate of a demand curve is not exact, there is usually a profitable range around the price that would maximize profit.

You are considering opening a fast-food store. Your fixed costs for the required land, building, parking lot paving, kitchen equipment, and neon sign will be $1,000,000. The variable cost will be $1.89 for servings which will sell for $2.89. How many servings must you sell to break even?

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. -If Randy Todd wants to maximize profits for SPI's new tennis racquets, then he should set a price (and produce that related output) where:

A profit-maximizing oligopolist should set a price by using:

In a down economy, a local florist surveys her customers to determine the amount they feel comfortable spending for a bouquet of flowers. Then she displays bouquets costing that exact amount in her refrigerated case. This is an example of:

Wilson sells a basketball to a wholesaler for $16, and the wholesaler applies a 20 percent markup. A retailer then applies a 33.3 percent markup. The final selling price is:

All customers have the same reference price for the same basic type of purchase.

Given the following data, compute the BEP in units: Selling price = $2.00 Variable cost = $0.75 Fixed cost = $250,000

Which of the following is a TRUE statement about markups?

Average-cost pricing will result in larger than expected profit:

The Federal Trade Commission encourages bait pricing because it reduces the prices that consumers pay for products.

A standard markup is often set close to the firm's

If a demand curve were elastic within a price range, then:

A tire retailer is advertising a very low price on a popular size tire. When a customer comes into the store, the clerk says the low-priced item is sold out, and tries to convince the customer to buy the top-of-the-line model--claiming the low priced model is not a very good buy even at the low price. This is an example of:

The marginal revenue curve and the demand curve are the same thing.

The basic problem with the average-cost approach is that it

Different firms in the same line of business are likely to use the same markup percent:

A producer with only one product has total fixed costs of $15,000 per month. In addition, it cost the producer $100 in variable costs to produce each unit of his product (raw materials and direct labor cost). The producer charges his wholesalers $125 per unit. How many units of the product does the producer have to sell each month in order to break even?