Deck 15: Pricing Practices

Question 1

A by-product:

A) has MR = 0.
B) results from an increase in the production of some other output.
C) has MC = MC_Q.
D) is identified in terms of its excess production.

Answer 1

B

Question 2

A 50% markup on price is equivalent to a markup on cost of:

A) 25%
B) 33%
C) 50%
D) 100%

Answer 2

D

Question 3

When transferred products can be sold in perfectly competitive external markets, the optimal transfer price is the:

A) external market price.
B) marginal revenue of the transferred-to (buying) division.
C) marginal revenue in the output market.
D) marginal cost of the transferring (selling) division.

Answer 3

A

Question 4

With price discrimination, higher prices are charged when:

A) the price elasticity of demand is high.
B) the price elasticity of demand is low.
C) the cross-price elasticity of demand is high.
D) the cross-price elasticity of demand is low.

Question 5

If a firm charges a price of $6 for a product with a cost of $4, the markup on cost equals:

A) 67%
B) 33%
C) 150%
D) 50%

Question 6

When e_P = -2, the optimal markup on cost is:

A) 100%
B) 67%
C) 50%
D) 33%

Question 7

When engaging in short-run incremental analysis, managers should ignore:

A) fixed costs.
B) implicit costs.
C) explicit costs.
D) effects on the costs of already existing products.

Question 8

During peak periods:

A) incremental costs are relevant for pricing purposes.
B) fully allocated costs are relevant for pricing purposes.
C) facilities are underutilized.
D) expansion is not required to further increase production.

Question 9

Consumers' surplus represents:

A) total revenues.
B) total revenues less total costs.
C) the excess of revenues above and beyond the cost of output to producers.
D) the value of output to consumers above and beyond the amount paid to producers.

Question 10

If a firm charges a price of $5 for a product with a cost of $2, the markup on price equals:

A) 60%
B) 150%
C) 250%
D) 40%

Question 11

A 50% markup on cost is equivalent to a markup on price of:

A) 25%
B) 33%
C) 50%
D) 100%

Question 12

When e_P = -1, the optimal markup on price is:

A) 100%
B) 67%
C) 50%
D) 33%

Question 13

A firm supplying a single product to two distinct submarkets will maximizes profits by equating:

A) average revenue in each market to average cost.
B) average revenue in each market to marginal cost.
C) marginal revenue in each market to marginal cost.
D) price in each market to marginal cost.

Question 14

Profit margin equals:

A) marginal cost minus marginal revenue.
B) average cost minus average revenue.
C) average cost minus average variable cost.
D) price minus cost.

Question 15

The competitive market pricing rule-of-thumb for profit maximization is to set:

A) MR = MC
B) MR = MC/[1 + (1/e_P)]
C) P = MC/[1 + (1/e_P)]
D) MC = MR/[1 + (1/e_P)]

Question 16

The optimal markup on price will fall following an increase in:

A) cost.
B) revenue.
C) the price elasticity of demand.
D) price.

Question 17

If e_P = -3, the optimal markup on price is:

A) 33%
B) 50%
C) 300%
D) 25%

Question 18

Price discrimination exists when:

A) costs vary among customers.
B) markups vary among customers.
C) markups are constant among customers.
D) prices vary among customers.

Question 19

Consumers' surplus is:

A) the costs consumers would have to pay to produce a product minus the amount paid to sellers.
B) the consumer's budget minus total expenditures.
C) the value of a good to consumers minus the amount paid sellers.
D) quantity supplied minus quantity demanded.

Question 20

Successful price discrimination requires:

A) the ability to prevent transfers among customers in different submarkets.
B) inelastic demand in each submarket.
C) constant marginal costs.
D) identical price elasticities among submarkets.

Question 21

Optimal Markup. Mary Richards is a pricing manager of Caring Move, Inc., a local visiting nurse firm in the home care market. Richards has been asked to complete an analysis of profit margins for the firm. Unfortunately, her predecessor on this project was abruptly terminated, leaving only sketchy information on existing pricing practices.

Question 22

Markup on Cost. King Midas Muffler, Inc., offers automobile muffler replacement at a number of outlets in the greater Boston area. The company recently initiated a policy of matching the lowest advertised competitor price. As a result, King Midas has been forced to reduce the average price for mufflers by 3%, but has enjoyed an 18% increase in customer traffic. Meanwhile, marginal costs have held steady at $74.97 per muffler.
A. Calculate the point price elasticity of demand for mufflers.
B. Calculate King Midas' optimal price and markup on cost.

Question 23

Optimal Price. Lean Jeans, Inc., recently offered rebates of $1 off the regular $50 price on their low-rider jeans. Sales responded, rising 4% over the previous month's level.
A. Calculate the point price elasticity of demand for Lean Jeans.
B. If marginal cost per unit is $20, was the original $50 price optimal?

Question 24

Optimal Price. Nice Bicycles, Inc., recently offered rebates of $10 off the regular $400 price on Triath model bikes. Sales responded, rising 5% over the previous month's level.
A. Calculate the point price elasticity of demand for Triath bicycles.
B. If marginal cost per unit is $200, was the original $400 price optimal?

Question 25

Optimal Markup. Ralph Kramden is managing partner of Kramden & Associates, Inc., a New York-based management consulting firm. Kramden has asked you to complete an analysis of profit margins for Ed Norton, Inc., a client firm. Unfortunately, your predecessor on this project was abruptly transferred, leaving only sketchy information on the clients' pricing practices.

Question 26

Markup on Cost. Chim-Chimery, Inc., offers chimney sweepings in the Montpelier, Vermont area. The company recently initiated a policy of matching the lowest advertised competitor price. As a result, Chim-Chimery has been forced to reduce the average price for chimney cleaning by 4%, but has enjoyed an 8% increase in demand. Meanwhile, marginal costs have held steady at $25 per cleaning.
A. Calculate the point price elasticity of demand for chimney cleaning.
B. Calculate Chim-Chimery's optimal price and markup on cost.

Question 27

If e_P = -3, the optimal markup on cost is:

A) 33%
B) 50%
C) 300%
D) 25%

Question 28

Markup on Price. Carpet Magic, Inc., provides professional, in-the-home carpet cleaning services to residential customers in the Binghamton, New York area. The company recently raised its service price from $94.50 to $121.50 per room. As a result, sales fell to 5,000 from 7,000 units in the year-earlier period.
A. Calculate the arc price elasticity of demand for Carpet Magic service.
B. Assume that the arc price elasticity (from part A) is the best available estimate of the point price elasticity of demand. If marginal cost is $30.375 per unit for labor and materials, calculate Carpet Magic's optimal markup on price and its optimal price.

Question 29

Markup on Cost. Stinging Pesticides, Inc., provides scorpion control services, to residential and business customers in the El Paso area. The company recently raised its service price from $70 to $80 per annual treatment. As a result, sales fell to 37,500 from 52,500 treatments in the year earlier period.
A. Calculate the arc price elasticity of demand for SPI service.
B. Assume that the arc price elasticity (from Part A) is the best available estimate of the point price elasticity of demand. If marginal cost is $48 per unit for labor and materials, calculate SPI's optimal markup on price and its optimal price.

Question 30

Price discrimination exists when:

A) prices are set according to the price elasticity of demand.
B) markups differ.
C) prices differ.
D) costs differ.

Question 31

Optimal Markup. Carol Vessey is a managing partner of Dry Air, Inc., a New Orleans-based dehumidifier-systems distribution firm. Vessey has been asked to complete an analysis of profit margins for the firm. Unfortunately, her predecessor on this project was abruptly transferred, leaving little information on the firm's current pricing practices.

Question 32

Optimal Markup. Cliff Claven is a summer intern at Wicker Works, Inc., a Boston firm that distributes raw wicker in several grades or categories. Claven has been asked to complete an analysis of profit margins for each grade of wicker. Unfortunately, his predecessor on this project abruptly left the company, leaving only sketchy information on his pricing practices.

Question 33

Markup on Cost. Radon Detectives, Inc., offers radon testing to homeowners in the Bethlehem, Pennsylvania area. The company recently initiated a policy of matching the lowest advertised competitor price. As a result, Radon Detectives has been forced to reduce the average price for radon tests by 1%, but has enjoyed a 3% increase in demand. Meanwhile, marginal costs have held steady at $30 per test.
A. Calculate the point price elasticity of demand for radon tests.
B. Calculate Radon Detectives' optimal price and markup on cost.

Question 34

Markup on Price. Plan It Right, Inc., provides party planning and catering services for elegant residential parties in the Louisville area. The company recently raised its service price from $900 to $1,100 per party. As a result, sales fell to 350 from 450 units in the year earlier period.
A. Calculate the arc price elasticity of demand for PIR service.
B. Assume that the arc price elasticity (from part A) is the best available estimate of the point price elasticity of demand. If marginal cost is $220 per unit for labor and materials, calculate PIR's optimal markup on price and its optimal price.

Question 35

Optimal Price. Woofer-Tweeter, Inc., recently offered instant rebates of $25 off the regular $1,000 price on Soundman CD players. Sales responded, rising 6.25% over the previous month's level.
A. Calculate the point price elasticity of demand for Soundman CD players.
B. If marginal cost per unit is $600, was the original $1,000 price optimal?

Question 36

Optimal Price. Japanese Imports, Inc., recently offered rebates of $375 off the regular $25,000 price on Sayonara mini SUVs. Sales responded, rising 12% over the previous month's level.
A. Calculate the point price elasticity of demand for Sayonara vehicles.
B. If marginal cost per unit is $21,875, was the original $25,000 price optimal?

Question 37

If the optimal markup on price is 50%, the optimal markup on cost is:

A) 100%
B) 75%
C) 50%
D) 25%

Question 38

If the optimal markup on cost is 25%, the optimal markup on price is:

A) 20%
B) 25%
C) 50%
D) 100%

Question 39

Markup on Cost. Oil-n-Go, Inc., offers automobile oil changes at a number of outlets in the greater Ann Arbor area. The company recently initiated a policy of matching the lowest advertised competitor price. As a result, Oil-n-Go has been forced to reduce the average price for oil changes by 5%, but has enjoyed a 15% increase in customer traffic. Meanwhile, marginal costs have held steady at $20 per oil change.
A. Calculate the point price elasticity of demand for oil changes.
B. Calculate Oil-n-Go's optimal price and markup on cost.

Question 40

Markup on Price. TLC Tree Service, Inc., provides tree spraying services to residential customers in the Detroit area. The company recently raised its service price from $50 to $60 per tree. As a result, sales fell to 3,900 from 4,900 units in the prior year.
A. Calculate the arc price elasticity of demand for TLC service.
B. Assume that the arc price elasticity (from Part A) is the best available estimate of the point price elasticity of demand. If marginal cost is $12 per unit for labor and materials, calculate TLC's optimal markup on price and its optimal price.

Question 41

Incremental Analysis. St. Thomas Printing Company is a small printer serving the greater Minneapolis-St. Paul metropolitan area. The company recently bid on a government contract for the printing of a new pamphlet explaining phone scams. St. Thomas Printing has incurred bid development and marketing expenses of $250 prior to submission of the bid. The bid was based on the following projected costs:

Question 42

Joint Product Pricing. The Frank Boulger Mining Company operates the Million Dollar Mine in Leadville, Colorado. Each ton of mined ore yields one ounce of silver and one pound of lead in a fixed 1:1 ratio. Marginal costs are $8 per ton of ore mined.
The demand and marginal revenue curves for silver are:

Question 43

Joint Product Pricing. The Golden State Mining Company operates a small gold and copper mine in a remote region of the Sierra Nevadas. Each ton of mined ore yields one ounce of gold and one pound of copper in a fixed 1:1 ratio. Marginal costs are $450 per ton of ore mined, plus a $30 per ton state land reclamation tax.
The demand and marginal revenue curves for gold are:

Question 44

Incremental Analysis. Sanford & Sons Construction Company is a building contractor serving the Mid-Atlantic region. The company recently bid on construction of a new office building in Richmond, Virginia. Sanford & Sons has incurred bid development and marketing expenses of $50,000 prior to submission of the bid. The bid was based on the following projected costs:

Question 45

Price Discrimination. The Do-Drop-Inn, Inc., provides vacation lodging services to both family and senior citizen customers. Yearly demand and marginal revenue relations for overnight lodging services, Q, are as follows:
Average variable costs for labor and materials are constant at $20 per unit.

Question 46

Price Discrimination. The Fun-Land Amusement Park is a 40-acre fun park full of rides, shows, and shops. Fun-Land's marketing department segments its customer base into two parts: local patrons and tourists. Fun-Land assumes local patrons are more price sensitive than out-of-town tourists. Yearly demand and marginal revenue relations for overnight lodging services, Q, are as follows:

Average variable costs for labor and materials are constant at $20 per unit.

Question 47

Incremental Analysis. Fan Diego, Inc., manufactures a hand-held electric hair dryer. Sales have increased steadily during recent years and, because of a recently completed expansion program, annual capacity is now 250,000 units. Production and sales during the coming year are forecast at 150,000 units, and standard production costs have been estimated as:

In addition to production costs, Fan Diego incurs fixed selling expenses of 50¢ per unit, and variable warranty repair expenses of 75¢ per unit. Fan Diego currently receives $8.25 per unit from its customers (primarily retail department stores) and expects this price to hold during the coming year.
After making the above projections, Fan Diego received an inquiry concerning the purchase of a large number of units by a discount department store. The inquiry contained two purchase offers: