Deck 11: Pricing Decisions

Question 1

Laboratory or test-market experiments provide insights into the price-demand relationship for a product and also reflect the likely reactions of competitors to different prices or changes in price over time.

Answer 1

False

Question 2

Skimming is not appropriate for businesses pursuing prospector strategies involving investments in the development of a stream of new products.

Answer 2

False

Question 3

A premium price policy is most appropriate for businesses pursuing differentiated defender strategies.

Answer 3

True

Question 4

It is best to ignore situational factors such as competitors' costs and prices,availability of substitutes,and prices of substitutes while setting the price for product.

Question 5

The price sensitivity of demand for a product determines the ceiling of the range of acceptable prices.

Question 6

Prices set solely on the basis of competitive considerations always reflect customer value.

Question 7

The larger the proportion of price-sensitive customers in a product's market,the more sensitive overall demand is to a change in the product's price.

Question 8

Penetration pricing is appropriate when,in addition to a large market,the firm's costs are low compared to competitors' and the SBU is pursuing a low-cost strategy.

Question 9

Variable costs remain constant per unit regardless of how many units are produced.

Question 10

The cost curve precisely depicts the variation in the quantity demanded at different prices.

Question 11

The ability of a firm to be a price leader whose pricing decisions are emulated by other companies is determined solely by its market share.

Question 12

When a firm has a strong competitive position based on superior product quality or customer service,its primary pricing objective is to generate sufficient revenue to maintain that advantage.

Question 13

Price elasticity of demand is calculated by dividing the percent change in price by the percent change in quantity demanded.

Question 14

The skimming pricing strategy is most often used by not-for-profit organizations

Question 15

Penetration pricing is the most appropriate strategy when consumers are not price-sensitive.

Question 16

A break-even analysis can calculate break-even and target return volumes at different price levels.

Question 17

Prestigious products such as expensive wines and liquors and those whose quality is difficult to objectively judge have negatively sloping demand curves.

Question 18

The typical procedure for determining price under the markup approach is to first calculate the cost per unit by adding variable cost to fixed costs divided by the change in price.

Question 19

A product's average cost per unit and the price necessary to cover that cost varies with the quantity produced.

Question 20

Under a going-rate pricing approach,firms set prices by adding a desired markup on retail to the unit cost.

Question 21

In freight absorption pricing,the seller does not pick up any freight charges.

Question 22

In addition to price discrimination,the Sherman Act prohibits both horizontal and vertical price fixing.

Question 23

The penetration pricing strategy is most appropriate for a firm to pursue when:

A)the market in question is large.
B)customers are relatively insensitive to price.
C)the firm's costs are high compared to competitors'.
D)the firm is pursuing a differentiated strategy.

Question 24

A cross-elasticity is the percentage change in sales of one product induced by a 1 percent change in the price of another complementary product.

Question 25

When firms pioneer the development of a new product-market,they may set the price very high and appeal to only the least price-sensitive segment of potential customers in order to maximize short-term profits.This is a _____.

A)penetration pricing policy
B)harvesting policy
C)skimming price policy
D)survival

Question 26

Penetration pricing will most benefit a firm when:

A)customers in a market are very price-insensitive.
B)production costs are likely to increase with increasing volume.
C)the firm has a monopoly in a particular market.
D)it needs to set a low price in order to capture market share.

Question 27

To be profitable selling goods or services at auction,a firm must work to hold its costs up,relative to its competitors,and must have an accurate understanding of what those costs are.

Question 28

Which of the following best describes the sunk-investment effect on price sensitivity?

A)Customers are less price-sensitive when there are no acceptable substitutes for a product.
B)Customers are less price-sensitive when the purchase is necessary to gain full benefit from assets previously bought.
C)Customers are less price-sensitive when their expenditure for the product or service is a relatively low proportion of their total income.
D)Customers are less price-sensitive in the short run when they cannot store large quantities of the product as a hedge against future price increases.

Question 29

Rebates reduce the price of the product through a money refund offer.

Question 30

The demand curve depicts the relationship between:

A)profitability and demand.
B)product costs and price.
C)price and profitability.
D)price and demanD.

Question 31

A museum offers lower ticket prices for children from schools in the economically disadvantaged areas of the city.This is an example of _____ pricing.

A)skimming
B)prestige
C)social
D)harvesting

Question 32

A firm following a harvesting strategy would set product prices:

A)relatively low,only slightly above costs.
B)at the cost price,in order to penetrate the market.
C)relatively high,to maintain margins and maximize profits.
D)low,to maintain a presence in the market.

Question 33

Which of the following best describes the unique-value effect on price sensitivity?

A)Customers are less price-sensitive when there are no acceptable substitutes for a product.
B)Customers are less price-sensitive when the purchase is necessary to gain full benefit from assets previously bought.
C)Customers are less price-sensitive when their expenditure for the product or service is a relatively low proportion of their total income.
D)Customers are less price-sensitive in the short run when they cannot store large quantities
Of the product as a hedge against future price increases.

Question 34

Zone pricing is a compromise approach that falls between FOB and uniform delivered pricing.

Question 35

A firm observes that a particular product-market in which it is involved is in its late majority stage.So it adopts the differentiated defender strategy;and sets price to maintain margins and maximize profit or return on investment even though some customers may switch to competitive brands or substitutes.In view of this data we can say that the firm has adopted the _____ pricing objective.

A)penetration
B)skimming
C)survival
D)harvesting

Question 36

The difference between the value perceived by the customer and the manufacturer's marginal cost defines the range of possible prices.

Question 37

Discriminatory pricing occurs when a firm sells a product or service at two or more prices,not determined by proportional differences in cost.

Question 38

In psychological pricing the firm takes advantage of the fact that many consumers use price as an indication of quality.

Question 39

The value-in-use assessment process begins with the selection of a reference product,usually the product the customer is currently using or a major competitor's product.

Question 40

Which of the following pricing strategies involves setting the highest possible product price?

A)Social objectives
B)Penetration
C)Survival
D)Skimming

Question 41

Target-return pricing adds one critical element to the pricing equation over mark-up pricing.Which is this additional cost element?

A)The price sensitivity of demand
B)An evaluation of competitors' prices
C)The other products in the product line
D)The cost of invested capital

Question 42

If a company institutes a 3% price decrease and the result is a 6% increase in the quantity demanded,what is the price elasticity of demand for the product?

A)-2
B)+2
C)-.5
D)+.5

Question 43

Which of the following is the formula for determining price elasticity of demand?

A)Percentage change in quantity demanded divided by percent change in price
B)Percent change in price divided by percentage change in quantity demanded
C)Percentage change in quantity demanded divided by percent change in investment
D)Percent change in investment divided by percentage change in quantity demanded

Question 44

Which of the factors affecting customers' sensitivity to price is Duracell emphasizing when it claims in television ads that its batteries last longer than its competitors'?

A)Sunk-investment effect
B)Unique-value effect
C)Inventory effect
D)Shared-cost effect

Question 45

The price elasticity of demand is the:

A)degree of responsiveness of demand to a price change.
B)price sensitivity of the consumers in a market.
C)change in product price following a change in price of raw materials.
D)change in pricing relative to competitors' pricing.

Question 46

Buyers of GTB automobiles perceive such cars as more luxurious and more prestigious than other automobiles and are willing to pay more for these cars.This is an example of the _____ effect.

A)price-quality
B)shared-cost
C)difficult-comparison
D)end-benefit

Question 47

What is the break-even volume (in units)if the fixed cost of production is $1 million,the price of the product is $50,and variable cost is $25 per unit?

A)70,000
B)60,000
C)50,000
D)40,000

Question 48

When firms use the going-rate pricing approach,they base product prices on:

A)the cost of producing the products.
B)the prices of competitor's products.
C)the customer perceived value of the products.
D)the volume of sales of the products.

Question 49

Aries,a small-appliance manufacturer,produces a line of mixer-grinders and expects to sell 60,000 units in the coming period.A fixed cost of $600,000 is associated with producing the mixer-grinders,and variable cost is $20 per unit.The unit cost for each mixer-grinder would be _____.

A)20
B)30
C)10
D)40

Question 50

Which of the following would be a part of the variable costs for a firm?

A)product packaging materials
B)interest on debt
C)executive salaries
D)rent on buildings

Question 51

A hotel in Hawaii charges its hotel guests premium prices for food at its in-house restaurant.As the guests are unaware of lower-priced restaurants in the area,they are often seen to be less price-sensitive than the locals.Which of the factors that affect customers' sensitivity to pricebest explains the lower price-sensitivity of outsiders?

A)Shared-cost effect
B)Sunk-investment effect
C)Substitute-awareness effect
D)End-benefit effect

Question 52

Suppose that General Motors Corporation prices its new automobiles in such a manner that it would achieve a 15 percent return on its investment in these automobiles.Which of the following pricing policies is the company using?

A)Odd pricing
B)Price lining
C)Functional pricing
D)Target-return pricing

Question 53

The fixed cost per unit of a product:

A)remains constant per unit regardless of how many units are produced.
B)is the sum of marketing mix and variable costs for a given production.
C)declines as a firm produces and sells more of the product in a given period.
D)primarily includes costs of retailers and other distributors.

Question 54

A firm has unit costs of $10 per unit.The investment in capital for the production of the product is $2 million,expected unit sales are 100,000 units,and a desired rate of return on their investment is15%.Calculate the return price.

A)$13
B)$15
C)$17
D)$21

Question 55

The break-even volume for a product is 10,000 units,the fixed cost is $10,000,and variable cost is $1 per unit.What is the required selling price per unit?

A)$2.00
B)$1.50
C)$1.00
D)$.50

Question 56

James has invested in a health insurance plan that pays for half of his medical expenses.He is not very price-sensitive and does not hesitate to opt for expensive medial treatments.This is an example of the _____ effect.

A)unique-value
B)shared-cost
C)difficult-comparison
D)inventory

Question 57

The _____ of a product varies in magnitude directly with the production,but remains constant per unit regardless of how many units are produced.

A)fixed cost per unit
B)variable cost
C)total cost
D)average cost

Question 58

What is the unit cost of a product if the firm expects to sell 100,000 units,fixed costs being $1 million,and variable cost per unit being $20?

A)$30
B)$35
C)$40
D)$45

Question 59

Which of the following would be a part of the fixed costs of a firm?

A)Product packaging materials
B)Labor required to produce a unit of the product
C)Executive salaries
D)Costs of materials

Question 60

The unit cost of a product is $10.$2 million is invested in capital for the production of the product,and the expected sales are 100,000 units.How much would the target return price change if the desired rate of return on the investment is raised from 15% to 20%?

A)The target return price would go up by $1
B)The target return price would go down by $2
C)The target return price would go up by $5
D)The target return price would go down by $5

Question 61

How is unit cost calculated?

Question 62

Differentiate between target return pricing and market pricing.

Question 63

Cloud 9,a US-based producer of chips and snacks,sells its products to a French supermarket chain.30% of the revenues it receives from the sales must be spent on products from France.This is an example of a(n)_____ countertrade agreement.

A)barter
B)buyback
C)offset
D)compensation

Question 64

What is price lining? Explain with the help of an example.

Question 65

Which of the following best describes a trade-in allowance?

A)A price reduction granted to customers for turning in an old item when buying a new one
B)A price reduction to encourage customers to pay their bills promptly
C)A temporary reduction in the product's price in order to boost sales
D)An attempt to attract buyers by offering a product free to encourage the purchase of another product

Question 66

Explain the following terms: fixed costs (overhead),variable costs,and total costs.

Question 67

In what market conditions can a firm most appropriately adopt quality or service differentiation as a pricing object?

Question 68

A _____ gives a customer money off on a product,while a_____ reduces the product price through a money refund offer.

A)rebate;premium
B)coupon;rebate
C)coupon;premium
D)premium;coupon

Question 69

In the FOB pricing method:

A)the manufacturer pays all freight charges.
B)a standard freight charge is charged to all customers irrespective of location.
C)the company and the customer split the freight charges equally.
D)the customer pays all the freight charges.

Question 70

Which of the following best describes a premium?

A)A price reduction granted to customers for turning in an old item when buying a new one
B)A price reduction to encourage customers to pay their bills promptly
C)A temporary reduction in the product's price in order to boost sales
D)An attempt to attract buyers by offering a product free to encourage the purchase of another product

Question 71

In the uniform delivered pricing method:

A)the company pays all freight charges.
B)a standard freight charge is charged to all customers irrespective of location.
C)the company and the customer split the freight charges equally.
D)the customer pays all the freight charges.

Question 72

The expected value model is used to determine _____ prices where the price charged reflects the _____.

A)bid;lowest cost
B)bid;highest profit
C)value;lowest cost
D)value;highest profit

Question 73

When is differential pricing most likely to occur?

Question 74

What would the price elasticity of demand for a product be if the seller raises the price by 3% and demand falls by 12%? Would this indicate price elasticity or inelasticity?

Question 75

Many firms base their pricing decisions largely on what is necessary to recover their costs or match competitors.Discuss.

Question 76

Which of the following is true of freight absorption pricing?

A)The seller picks up all or part of the freight charges.
B)A standard freight charge is assessed every customer regardless of location.
C)The freight charge is equal to the average freight cost across all customers.
D)The seller does not pay any of the freight charges.

Question 77

Gloria,a company dealing in toiletries,sells its Big Saver shaving kits at a price less than the total price of the items,if priced separately.This is an example of _____.

A)differential pricing
B)cross-elasticity
C)price lining
D)product bundling

Question 78

List the steps involved in the price setting process.

Question 79

Compare the relative price levels associated with penetration pricing and maintaining a quality or service differentiation.

Question 80

Italian beverage company Flavors signs a contract to provide an Indian coffee company the latest coffee production equipment.The Indian company will pay Flavors both in cash as well as in the coffee it produces using the equipment.This is an example of a (n)_____ countertrade agreement.

A)barter
B)buyback
C)offset
D)cross-elasticity