The Economic Way of Thinking 13th Edition by David Prychitko, Peter Boettke, Paul Heyne

Exercise 6

Many firms use a technique called target pricing in trying to decide what prices to set for new products they're introducing. The target price is a price that enables the firm to recover a certain percentage of the product's development and production costs. What, in addition to costs, must the seller know in order to calculate the return a particular price will yield? If earnings from the sale of the product turn out to fall short of the target, should the firm raise the price? If earnings exceed the firm's expectations, should it lower the price?