Exam 17: Price Setting in the Business World

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.

Which of the following is an example of a cost-oriented price setting approach?

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:

High markups always mean big profits.

Average-cost pricing may lead to losses because there are a variety of costs-and each changes

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

A sales rep is paid a commission on each product sold. The commission is:

Henry has classified the following items under variable costs. Which item has he classified incorrectly?

Which of the following would NOT be included in a producer's total fixed cost?

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.

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

Total fixed costs do not change when output increases.

A firm in monopolistic competition with a down-sloping demand curve:

According to the text, markup (percent) means percentage of cost unless otherwise stated.

The sum of those costs that do not change in total-no matter how much is produced-is called:

It makes sense for a manager to use leader pricing on a product only if consumers are unlikely to be aware of the normal price.

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

A retailer who advertises a low price on an item-with no intent to sell that item-but only to attract customers to try to sell more expensive products is using:

The typical markup (percent) is the:

Average-cost pricing consists of adding a 20 percent markup to the average cost of an item.