Deck 18: Price Setting in the Business World

Question 1

Items with lower markups may be more profitable--if the stockturn is higher.

Answer 1

True

Question 2

A major problem with average-cost pricing is that it does not allow for cost variations at different levels of output.

Answer 2

True

Question 3

The stockturn rate is the number of times the average inventory must turnover to make a profit in a given year.

Answer 3

False

Question 4

A supermarket is bound to expect a higher stockturn for fresh fruits and vegetables compared to soaps and detergents.

Question 5

Average-cost pricing means adding a reasonable markup to the total cost of a product.

Question 6

Firms with high markups and low turnover rates may earn lower profits than firms with low markups and high turnover rates.

Question 7

High markups always mean big profits.

Question 8

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

Question 9

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

Question 10

Cost-oriented approaches are the most common price setting approach.

Question 11

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 25 percent.

Question 12

Most retailers and wholesalers set prices by using a different markup percent for each different product carried.

Question 13

A "markup chain" can be used to calculate the price structure in a whole channel.

Question 14

Retailers who earn high profits generally use higher markups than retailers who have low profits.

Question 15

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.

Question 16

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.

Question 17

By definition, a markup of $1 on a cost of $2 translates to a markup of 40 percent.

Question 18

A markup is the dollar amount added to the cost of products to get the selling price.

Question 19

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

Question 20

A low stockturn decreases inventory carrying cost and frees up working capital.

Question 21

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

Question 22

If a manager sells more than was expected when average-cost pricing was used to set a price, the firm will lose money.

Question 23

Break-even analysis evaluates whether the firm will be able to cover all its costs with a particular price.

Question 24

Total fixed costs do not change when output increases.

Question 25

Even if a firm's average variable cost remains constant per unit, its average cost will increase as output increases.

Question 26

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.

Question 27

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

Question 28

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

Question 29

A major advantage of average-cost pricing is that it assumes costs remain constant at different levels of output.

Question 30

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.

Question 31

Ignoring demand is the major weakness of average-cost pricing

Question 32

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

Question 33

In target return pricing, the desired target return is added to total cost; otherwise, it's the same as average-cost pricing.

Question 34

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

Question 35

At zero output, total variable cost is zero.

Question 36

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

Question 37

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

Question 38

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.

Question 39

Average fixed cost goes down as output decreases.

Question 40

Target return pricing is a variation of average-cost pricing--and has the same basic weakness as other average-cost methods.

Question 41

When the end benefit of a purchase is significant to the customer, he is likely to be less price sensitive.

Question 42

Marginal revenue is always positive.

Question 43

The greater the total expenditure, the less price sensitive customers are.

Question 44

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.

Question 45

Each possible price has its own break-even point.

Question 46

There is only one price that will be profitable for firms with down-sloping demand curves.

Question 47

Business customers are sometimes less price sensitive if there are switching costs.

Question 48

At the point where marginal revenue (MR) equals marginal cost (MC), marginal profit is near zero.

Question 49

In oligopolies, a price leader usually emerges and sets a price for all to follow.

Question 50

When customers have substitute ways of meeting a need, they are likely to be more price sensitive.

Question 51

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.

Question 52

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

Question 53

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

Question 54

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

Question 55

Price leaders usually emerge in pure competition--and they set a price for all to follow.

Question 56

Marketing managers wish they knew more about price sensitivity, but so far marketing research has been little help in identifying factors that influence customers.

Question 57

Break-even analysis is particularly accurate because it recognizes that the demand curve is downward sloping.

Question 58

If a company raises its price per unit, but keeps total fixed cost and variable cost per unit the same, the break-even point will be lower.

Question 59

Marginal analysis focuses on the changes in average fixed cost per unit and average variable cost from selling one more unit to find the most profitable price and quantity.

Question 60

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

Question 61

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.

Question 62

A firm using sequential price reductions starts with a high price but plans to reduce that price step-by-step until its product is sold out.

Question 63

Leader pricing is normally used with products for which consumers do have a specific reference price.

Question 64

Online auctions (on the Internet) are becoming very popular as a way to determine how much customers are willing to pay for a product.

Question 65

Price lining tends to result in faster turnover, fewer markdowns, quicker sales, and simplified buying.

Question 66

Auctions have not proved very effective in determining how much potential customers will (or will not) pay for a product.

Question 67

Leader pricing is typically used with well-known, widely used items which are not stocked heavily by consumers.

Question 68

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

Question 69

"Demand-backward pricing" involves a producer estimating an acceptable final consumer price and working backward to determine what the producer can charge in the channel.

Question 70

Demand-backward pricing is commonly used by producers of consumer products, especially shopping products such as women's clothing and appliances.

Question 71

Value in use pricing considers what a customer will save by buying a product.

Question 72

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

Question 73

The sole objective of leader pricing is to sell large quantities of the leader items.

Question 74

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

Question 75

If Radio Shack offers several models of clock radios at each $5 increment between $19.95 and $49.95, it is probably practicing odd-even pricing.

Question 76

Demand estimates are required for demand-backward pricing to be successful.

Question 77

Sequential price reductions and clearance sales are the same thing.

Question 78

"Psychological pricing" involves setting prices which end in certain numbers, while "odd-even pricing" is setting prices which have special appeal to target customers.

Question 79

The major disadvantage of price lining is that it is complicated for both clerks and customers.

Question 80

The price most consumers expect to pay for a product is called the leader price.