Chapter 19—Pricing Concepts TRUE/FALSE 1. Price is defined as the value of a good or service as measured by a certain dollar amount. Answer: False Rationale: Price is not necessarily measured in terms of money. In bartering, other items of value may be exchanged. 2. Profit is the price charged to customers multiplied by the number of units sold. Answer: False Rationale: This is revenue. Profit is revenue minus expenses. 3. Today’s firms must develop specific, measurable, and attainable pricing objectives if they hope to survive in highly competitive markets. Answer: True Rationale: Clear and achievable pricing objectives help firms remain competitive and ensure financial stability in the market. 4. The only way to maximize profits is to reduce costs by operating more efficiently. Answer: False Rationale: Profit maximization can also be achieved by expanding revenue by increasing customer satisfaction. Companies can also attempt to reduce costs and expand revenue at the same time. 5. Target return on investment is the most common profit objective used by firms. Answer: True Rationale: Many firms use target return on investment (ROI) as a key profit objective to ensure their investments generate desirable financial returns. 6. Market share is a company’s product sales as a percentage of its total sales for that industry. Answer: True Rationale: Market share measures a company's product sales relative to the total sales within its industry, indicating its competitive position. 7. Maximization of cash should be a long-term objective. Answer: False Rationale: Maximization of cash should never be a long-run objective because cash maximization may mean little or no profitability. Without profits, a company cannot survive. 8. In most communities, the price of gas is more or less the same at all area service stations. This is an example of sales-oriented pricing. Answer: False Rationale: It is an example of status quo pricing. Status quo pricing seeks to maintain existing prices or to meet the competition’s prices. 9. When pricing goals are mainly sales oriented, cost considerations usually dominate. Answer: False Rationale: When pricing goals are mainly sales oriented, demand considerations usually dominate. 10. Profit maximization is the price at which supply and demand are equal, and there is no inclination for prices to rise or fall. Answer: False Rationale: Price equilibrium is the price at which supply and demand are equal, and there is no inclination for prices to rise or fall. 11. If demand for milk is inelastic, consumers will not change their purchasing habits greatly when the price of milk changes. Answer: True Rationale: Inelastic demand means that price changes have little effect on the quantity demanded by consumers. 12. Research indicates that when a country’s inflation rate is high, demand becomes more elastic. Answer: False Rationale: If E is greater than 1, demand is elastic. 13. Unitary elasticity means that an increase in sales exactly offsets a decrease in prices, so total revenue remains the same. Answer: True Rationale: Unitary elasticity implies that the percentage change in quantity demanded equals the percentage change in price, keeping total revenue constant. 14. When many substitute products are available, demand is inelastic. Answer: False Rationale: Demand is elastic when there are many substitute products available. 15. Yield management systems employ techniques such as discounting early purchases, limiting early sales at these discounted prices, and overbooking capacity. Answer: True Rationale: Yield management involves maximizing revenue from perishable resources (such as hotel rooms or airline seats) through dynamic pricing strategies. Techniques include offering discounts for early bookings to encourage advance purchases, limiting the availability of discounted prices to preserve higher margins, and overbooking to mitigate revenue losses from no-shows or cancellations. 16. Yield management systems can only be used by service industries. Answer: False Rationale: As the popularity of yield management systems increases, their use is spreading beyond service industries. 17. Costs should not be part of price determination, especially not as a floor for long run pricing. Answer: False Rationale: Costs should generally be part of any price determination, if only as a floor below which a good or service must not be priced in the long run. 18. Variable costs vary with changes in the level of output, whereas marginal costs do not vary as output changes. Answer: False Rationale: While variable costs do vary with changes in the level of output, marginal costs are the changes in total costs associated with a one-unit change in output. 19. The owner of Buffalo Mountain Coffee Shop pays the same amount in rent each month no matter how many customers she serves. The shop owner’s rent is an example of a marginal cost. Answer: False Rationale: Rent would be an example of a fixed cost. 20. Markup pricing, adding an amount to cost to cover expenses and profit, is the most popular method used by wholesalers and retailers to establish a selling price. Answer: True Rationale: Markup pricing is widely used because it simplifies pricing decisions by adding a predetermined percentage or fixed amount to the cost of a product. This ensures that costs, including expenses and desired profit margins, are covered in the selling price. It's particularly common among wholesalers and retailers because it provides a straightforward approach to setting prices that can adapt to changes in costs and market conditions. 21. A firm has maximized its profits when its marginal revenue exceeds its marginal cost. Answer: False Rationale: A firm has maximized its profits when its marginal revenue equals its marginal cost. 22. Break-even analysis determines what sales volume must be reached before total revenue equals total costs. Answer: True Rationale: Break-even analysis calculates the sales volume at which total revenue equals total costs, helping businesses understand the point at which they cover all expenses and begin to make a profit. 23. As products enter the growth stage of the product life cycle, prices generally begin to stabilize. Answer: True Rationale: During the growth stage of the product life cycle, demand for the product typically increases as it gains market acceptance and consumer awareness. As competition intensifies, firms often focus on expanding market share rather than engaging in aggressive price competition. This can lead to prices stabilizing or even increasing slightly due to perceived value or differentiation strategies. 24. The manufacturers that remain in the market toward the end of the maturity stage typically offer similar prices. Answer: True Rationale: In the maturity stage of the product life cycle, the market becomes saturated, and competition among firms offering similar products intensifies. As a result, manufacturers often adopt competitive pricing strategies to maintain or gain market share. This leads to price stabilization among competitors as they try to retain their customer base and profitability. 25. Prices always steadily decline for a product in the decline stage of the product life cycle. Answer: True Rationale: When only one firm is left in the market, prices begin to stabilize, but they may eventually rise dramatically if the product survives and moves into the specialty goods category, as horse-drawn carriages and vinyl records have. 26. Adequate distribution for a new product is often obtained by reducing the size of the profit margin for its resellers. Answer: False Rationale: Adequate distribution for a new product is often obtained by offering a larger-than-usual profit margin to its distributors. 27. One strategy to get adequate distribution for a new product is to offer dealers a large trade allowance to help offset the costs of promotion. Answer: True Rationale: Offering trade allowances (such as promotional discounts or incentives) to dealers can motivate them to promote and distribute a new product effectively. Distributors and retailers may face costs associated with advertising, stocking, and selling new products. Trade allowances help mitigate these costs, making it more attractive for dealers to invest in the promotion and distribution of the new product. 28. There are three general types of shopping bots: broad-based, niche-oriented, and enterprise-level. Answer: False Rationale: There are two general types of shopping bots. The first is the broad-based type that searches a wide range of product categories. The second is the niche-oriented type that searches for prices for only one type of product. 29. Even though businesses are spending billions on Internet auctions, consumer auctions are likely to be the dominant form in the future. Answer: False Rationale: The opposite appears to be true. 30. Price should not be used as a promotional tool. Answer: False Rationale: Price is often used as a promotional tool to increase consumer interest. 31. High purchase prices may create feelings of pleasure and excitement in consumers. Answer: True Rationale: In consumer behavior, perceptions of price often correlate with perceptions of quality, status, or exclusivity. Higher purchase prices can create a sense of prestige or excitement for consumers who perceive the product as valuable or desirable. This psychological effect is often leveraged in marketing strategies for luxury goods or premium products to enhance their perceived value and attractiveness to consumers. 32. Research has shown that products perceived to be of high quality tend to benefit less from price promotions than products perceived to be of lower quality. Answer: False Rationale: They tend to benefit more from price promotions that products perceived to be of lower quality. MULTIPLE CHOICE 1. Price is best described as: A. that which is given up in exchange to acquire a good or service B. money exchanged for a good or service C. the psychological results of purchasing D. the cost in dollars for a good or service as set by the producer E. the value of a barter good in an exchange Answer: A Rationale: Price is that which is given up in exchange to acquire a good or service. 2. At Walmart, Randi saw a bag of daffodil flower bulbs and a box of plant fertilizer. The items, which were sold together, retailed at $28.50 but were marked down to $19.99. The $19.99 is the: A. revenue. B. price. C. profit. D. liquidity value. E. amortized value. Answer: B Rationale: Price is that which is given in exchange to acquire a product. 3. Which of the following statements is NOT true about price? A. Price can relate to anything with perceived value, not just money. B. Price is that which is given up in an exchange to acquire a product. C. Price means the same thing to the consumer and the seller. D. The price paid is based on the satisfaction consumers expect to receive from a product. E. Customers are interested in obtaining a perceived reasonable price. Answer: C Rationale: Price means one thing to the consumer and something else to the seller. To the consumer, it is the cost of something. To the seller, price is revenue, the primary source of profits. 4. When goods and services are exchanged, the trade is called: A. exchange. B. substitution. C. barter. D. swap. E. bargaining. Answer: C Rationale: This is the definition of barter. 5. Revenue: A. equals quantity sold times profit margin B. equals price minus costs C. equals return on investment D. is synonymous with profit E. equals price of goods times quantity sold Answer: E Rationale: Revenue is the price charged to customers multiplied by the number of units sold. 6. _____ pay for every activity of the company. A. Revenues B. Investments C. Retained earnings D. Profits E. Prices Answer: A Rationale: Revenue is what pays for every activity of the company: production, finance, sales, distribution, and so on. 7. Money that is left over after paying for company activities is called: A. return on investment. B. a contribution margin. C. profit. D. net worth. E. a current asset. Answer: C Rationale: Profit is revenue minus expenses. 8. At Walmart, Randi saw a bag of daffodil flower bulbs and a box of plant fertilizer. The items, which were sold together, retailed at $28.50 but were marked down to $19.99. The retailer sold one at the $28.50 price and five at the $19.99 price. The retailer’s revenue is: A. $8.51 B. $19.99 C. $28.50 D. $128.45 E. $171.00 Answer: D Rationale: Revenue is the price charged to customers multiplied by the number of units sold. $28.50 + ($19.99 × 5) = $128.45. 9. Which of the following is not a real trend that has affected the consumer market? A. The increased availability of bargain-priced private and generic brands has put downward pressure on overall prices. B. Buyers evaluate the price of new products against the value of existing products. C. Many firms are trying to maintain or regain their market share by raising prices. D. The Internet has made comparison shopping easier. E. The United States was in a recession from late 2007 until 2009. Answer: C Rationale: Many firms are trying to maintain or regain their market share by cutting prices. 10. For convenience, pricing objectives can be divided into three categories. They are: A. refundable, competitive, and attainable B. perceived, actual, and unique-situational C. differentiated, niche, and undifferentiated D. profit oriented, sales oriented, and status quo E. monopolistic, fixed, and variable Answer: D Rationale: Profit-oriented objectives include profit maximization, satisfactory profits, and target return on investment. Sales-oriented pricing objectives are based either on market share or on dollar or unit sales. Status quo pricing seeks to maintain existing prices or to meet the competition’s prices. 11. An organization is using _____ when it sets its prices so that total revenue is as large as possible relative to total costs. A. profit maximization B. market share pricing C. demand-oriented pricing D. sales maximization E. status quo pricing Answer: A Rationale: Profit maximization is a type of profit-oriented pricing objective and means setting prices so that total revenue is as large as possible relative to total costs. 12. When Apple, Inc. originally introduced its iPhone, it was priced at what many believed to be about as high as the market would allow. Within weeks, Apple lowered the price of the iPhone. It appears that Apple entered the market with a _____ approach to pricing the iPhone. A. market share pricing B. profit maximization C. demand-oriented D. sales maximization E. status quo pricing Answer: B Rationale: Profit maximization means setting prices so that total revenue is as large as possible relative to total costs. 13. When Insight Research Associates quotes a marketing research project, management will first estimate the cost to conduct the research and produce and deliver the final client report. The next step in determining the price is to add 30 percent to that cost estimate. This becomes the price estimate given to the potential research client. This suggests that Insight Research Associates uses a(n) _____ pricing objective. A. profit-oriented B. market share maximization C. status quo D. sales maximization E. supply–demand equalization Answer: A Rationale: Target return on investment is one of the most common types of profit-oriented pricing objectives. 14. Thompson Pool and Patio is known for quality pool installations, excellent customer service, and reasonable prices. If you want to have a Thompson pool, you will have to wait about six months due to demand for their product. While Thompson could probably price its product higher, given the demand, they don’t. Instead, the company sets its price so that it will earn a reasonable level of profits. Thompson seems to base its pricing policy on: A. profit maximization. B. earning satisfactory profits. C. creating retained earnings. D. making the most money as possible. E. decreasing consumer demand. Answer: B Rationale: The objective of satisfactory profits is characterized by seeking a level of profits that is satisfactory to management and owner(s). 15. _____ is equal to net profit after taxes divided by total assets. A. Return on investment B. Economic order quantity C. Target-on-sales D. Retained earnings E. Efficiency maximization Answer: A Rationale: This is the definition of return on investment (ROI). 16. Pierre’s Ice Cream Company produces ultra-rich ice cream, which it sells in the Cleveland, Ohio, area. Last year, it managed to exceed its target return on investment (ROI) for the current fiscal year. The following results were found on its financial statements: What was the actual ROI for Peirre’s Ice Cream Company? A. 6.67 percent B. 10 percent C. 22 percent D. 28 percent E. 100 percent Answer: B Rationale: ROI is net profits after taxes divided by total assets: $50,000 ÷ 500,000 = 10 percent. 17. Britney is fifteen years old and wants to open her own business selling cupcakes to local coffee shops and restaurants. She is having a tough time deciding whether to base her pricing objectives on market share, dollar sales, or unit sales. Regardless of which she chooses, her pricing objective can be categorized as: A. status quo. B. profit oriented. C. need oriented. D. cost oriented. E. sales oriented. Answer: E Rationale: Sales-oriented pricing objectives are based on either market share or dollar or unit sales. 18. A company using market share pricing has a _____ pricing objective. A. profit-oriented B. sales-oriented C. demand-oriented D. supply-oriented E. status quo Answer: B Rationale: Sales-oriented pricing objectives are based either on market share or on dollar or unit sales. 19. _____ is a company’s product sales as a percentage of total sales for that industry. A. Return on investment B. Profit share C. Revenue share D. Market share E. Contribution Answer: D Rationale: This is the definition of market share, and sales can be reported in dollars or in units of product. 20. At a price of $1,192,057, the Bugatti Veyron may be the most expensive street-legal car on the market today. Obviously, Bugatti is NOT using a(n) _____ pricing objective in setting the price for this car. A. inelastic or supply-oriented B. market share or sales maximization C. profit maximization or target return on investment D. status quo or satisfactory profits E. demand-oriented or supply-oriented Answer: B Rationale: A lower price allows a company to maximize sales and build market share, but Bugatti's high price is geared towards the other options. 21. At the end of the summer, the Bloomin’ Garden Center reduced the price on all of its plants, fertilizer, and potting soil by 50 percent in order to liquidate this inventory. What type of pricing strategy is being used in this example? A. Supply oriented B. Sales maximization C. Target return on investment D. Satisfactory profit E. Profit maximization Answer: B Rationale: Sales maximization ignores profit and competition for the purpose of raising cash. 22. Dixie Furniture Company has recently moved to a new, larger location. At this new location, it has been unable to attract sufficient customers. Its owner did not have the cash to pay the current loan installment due on the building and inventory, so he decided to reduce all merchandise prices by at least 50 percent for a weekend sale to earn enough to make his loan payment. His pricing objective can be classified as: A. market share maximization. B. satisfactory profits. C. asset maximization. D. sales maximization. E. target ROI. Answer: D Rationale: The strategy described will maximize sales dollars but will not maximize or improve any of the other objectives in the long term. 23. As a short-term pricing objective, _____ can be effectively used on a temporary basis to sell off excessive inventory. A. profit maximization B. profit-oriented pricing C. status quo pricing D. sales maximization E. market share pricing Answer: D Rationale: Sales maximization pricing is a short-term price reduction to increase sales. 24. If a company’s pricing objective is to meet the competition or to maintain existing prices, it is using _____ pricing. A. head-on B. target return on investment C. status quo D. market share E. demand-oriented Answer: C Rationale: This defines status quo pricing. 25. When the local Shell station raises or lowers its prices on its gasoline, the Marathon station across the street makes the same changes in its pricing. This is an example of _____ pricing. A. status quo B. target return C. market share D. predatory E. cost-plus Answer: A Rationale: Status quo pricing is best described as meeting the competition. 26. Which of the following statements describes an advantage of status quo pricing? A. Status quo pricing is derived from actual costs of manufacturing. B. Status quo pricing maintains the organization’s differential advantage. C. Status quo pricing is active, not reactive. D. Status quo pricing causes price wars. E. Status quo pricing requires little planning. Answer: E Rationale: Status quo pricing requires little planning because it involves just copying the competitions’ pricing policies. 27. Although many factors can influence price, the primary determinants are: A. costs of manufacturing and distribution B. the demand for the good and the cost to the seller C. demand by the consumer and perceived quality D. distribution and promotion strategies E. stage of the product life cycle and costs to the consumer Answer: B Rationale: The price that managers set for each product depends mostly on two factors: the demand for the good or service and the cost to the seller for that good or service. 28. The quantity of a product that will be sold in the market at various prices for a specified period is called: A. market share. B. demand. C. supply. D. value. E. revenue. Answer: B Rationale: This is the definition of demand. 29. The price of the good or service is a key decision for a marketer because it most significantly and directly affects the product’s: A. distribution. B. costs. C. demand. D. promotion. E. quality. Answer: C Rationale: The quantity of a product that people will buy depends on its price. 30. Most demand curves slope: A. horizontally B. upward and to the right C. downward and to the left D. vertically E. downward and to the right Answer: E Rationale: For most products when prices increase, demand will decrease. 31. Peggy’s Twist Shack sells soft-serve ice cream. Peggy graphed the demand per week for vanilla ice cream cones. The graph indicates a demand schedule that slopes downward and to the right. This graph indicates that the quantity of vanilla ice cream cones demanded increases as: A. cost increases. B. supply decreases. C. price increases. D. price decreases. E. supply increases. Answer: D Rationale: The lower the price, the more goods or services will be demanded. 32. The _____ is the quantity of a product that will be sold in the market at various prices for a specified period, and _____ is the quantity of a product that will be offered to the market by suppliers at various prices for a specified period. A. demand; inventory B. demand; supply C. supply; demand D. inventory; demand E. inventory; supply Answer: B Rationale: These are the definitions of demand and supply, respectively. 33. _____ is the quantity of a product that will be offered to the market at various prices for a specified period. A. Distribution B. Supply C. Price D. Equilibrium E. Elasticity Answer: B Rationale: This is the definition of supply. 34. When the price of a product is set at a level where demand and supply are the same, price _____ has been achieved. A. equilibrium B. stability C. leverage D. symmetry E. status quo Answer: A Rationale: Price equilibrium is the price at which demand and supply are equal. 35. At a price of $6,000, only 191 of the Moulton 60 model bicycle are being made. If Moulton sells each one of the bicycles at that price, then a state of _____ has been achieved. A. symmetry B. marketing balance C. unitary economics D. commerce stability E. price equilibrium Answer: E Rationale: Price equilibrium is achieved at the price at which supply is equal to demand. 36. Bottles of Pure Hawaiian Air contain air that smells like the floral bouquet that greets tourists as they get off the plane in Hawaii. When a tourist shop began selling Pure Hawaiian Air, it charged $5 per bottle and could not keep up with the demand. It has since raised the price to $7. Now the shop is still selling all the bottles of Pure Hawaiian Air it carries, but the owner is not forced to reorder on a daily basis. The $7 price is probably a(n): A. supply schedule. B. symmetrical price. C. price equilibrium. D. inventory equalizer. E. inelastic price. Answer: C Rationale: When demand and supply are approximately equal, price equilibrium is reached. 37. Consumers’ responsiveness or sensitivity to changes in price is known as: A. break-even. B. Equilibrium. C. unitary revenue. D. asymmetrical demand. E. elasticity of demand. Answer: E Rationale: This is the definition of elasticity of demand. 38. When consumers are sensitive to price changes, _____ occurs. A. inelastic demand B. elastic supply C. elastic demand D. inelastic supply E. unitary elasticity Answer: C Rationale: This is the definition of elastic demand. 39. While the sales of the Apple iPhone have been great from the beginning, when Apple released its iPhone 4S and cut the price of the iPhone 4 from $399 to $199, sales exploded with one million iPhone 4s sold the first weekend. Demand for the iPhone appears to be: A. unitary. B. predictable. C. synergistic. D. inelastic. E. elastic. Answer: E Rationale: Elastic demand occurs when consumers by more or less of a product when the price changes. 40. What happens when demand is elastic? A. As price goes up, revenue goes down. B. As price goes down, revenue goes down. C. As price goes up, revenue goes up. D. As price goes up, revenue does not change. E. As price goes down, revenue does not change. Answer: A Rationale: If demand is elastic, an increase in price will decrease demand by a larger amount, reducing total revenue 41. If price _____ and revenue _____, demand is elastic. A. goes up; goes down B. goes down; goes down C. goes down; goes up D. down; stays the same E. goes up; stays the same Answer: C Rationale: If price goes down and revenue goes up, demand is elastic. 42. _____ occurs when an increase in sales exactly offsets a decrease in price so that total revenue remains exactly the same. A. Inelastic demand B. Functional elasticity of demand C. Unitary elasticity D. Highly elastic demand E. Fixed elasticity Answer: C Rationale: Unitary elasticity is a situation in which total revenue remains the same when prices change. 43. When price decreases and total revenue falls, demand is: A. elastic. B. inelastic. C. absolute. D. unitary. E. stable. Answer: B Rationale: This is characteristic of inelastic demand, which means that an increase or decrease in price will not significantly affect the demand for the product. 44. If price goes up or down and revenue stays the same: A. elasticity is universal. B. elasticity is quantum. C. elasticity is solitary. D. elasticity is unitary. E. None of the above. Answer: D Rationale: If price goes up or down and revenue stays the same, elasticity is unitary. 45. When the NES Group lowered the price of its professional-grade meat slicers from $2,300 to $1,600, demand doubled from four units sold per month to eight units per month. However, total revenue dropped. This is an example of: A. substitute goods B. unitary elasticity C. elastic demand D. consumer shortage E. inelastic demand Answer: E Rationale: Inelastic demand is characterized by price and revenue both falling. 46. When Nesco brand food hydrators sold for $59.99, Nesco sold 90 dehydrators. When the company dropped the price of its dehydrators to $44.95, it sold 145 dehydrators. Demand for the food dehydrators appears to be: A. elastic. B. inelastic. C. unitary. D. symmetrical. E. asymmetrical. Answer: A Rationale: The first price is $59.99 with total revenue of $5,399.10; the second price is $44.95 with total revenue of $6,517.75. Therefore, price dropped, and total revenue went up. 47. Demand for which of the following products or services is most likely inelastic? A. Fishing boats B. Wheat bread C. Pedicures D. Filet mignon steaks E. Digital cameras Answer: B Rationale: If there is a crop shortage, prices escalate, but consumers still maintain the same level of demand because food—particularly bread—is a necessity. 48. All of the following factors directly affect the elasticity of demand EXCEPT: A. a product’s other uses. B. inputs needed to manufacture the product. C. availability of substitute goods. D. price relative to a consumer’s purchasing power. E. product durability. Answer: B Rationale: Inputs at time of manufacture only indirectly affect the demand, if at all. 49. Which of the following would imply elastic demand? A. Price is low relative to purchasing power B. Nondurable product C. Low inflation rate D. Many substitute products E. All of these choices Answer: D Rationale: When there are many substitute products, the consumer can easily switch from one product to another, making demand elastic. The other situations make demand inelastic. 50. The greater the number of different uses for a product, the more _____ demand tends to be. A. elastic B. inelastic C. unitary D. volatile E. stable Answer: A Rationale: If a product has only one use, the quantity purchased probably will not vary as price varies. 51. What does “YMS” stands for? A. Yorkshire manufacturing sector. B. Yield management systems. C. Yes-man syndrome. D. Yardstick measurement scale. E. Year-end marketing services. Answer: B Rationale: The initialism “YMS” stands for yield management systems. 52. Yield management systems were first developed by which industry? A. The manufacturing industry. B. The airline industry. C. The retail industry. D. The healthcare industry. E. The automobile industry. Answer: B Rationale: Yield management systems were first developed by the airline industry. 53. Yield management systems are used to: A. determine the availability of product substitutes in complex industries that are experiencing rapid change B. profitably fill unused capacity C. predict necessary service levels to achieve revenue goals D. determine whether it is financially more feasible to buy a new product or repair a broken one E. create elastic demand for low-involvement products Answer: B Rationale: Yield management systems use complex mathematical software to profitably fill unused capacity by discounting early purchases, limiting early sales at these discounted prices, and overbooking capacity. 54. _____ use complex mathematical software to profitably fill unused capacity. A. Yield management systems B. Capacity correlation systems C. Service forecasting tools D. Service management systems E. Capacity management software Answer: A Rationale: Yield management systems use complex mathematical software to profitably fill unused capacity by discounting early purchases, limiting early sales at these discounted prices, and overbooking capacity. 55. Allstate has more than 1,500 price levels determined by complex algorithms that analyze 16 credit report variables, including late payments and card balances. Allstate is using a _____ to set prices. A. yield management system B. capacity correlation system C. service forecasting tools D. service management system E. capacity maintenance tool Answer: A Rationale: A yield management system is complex mathematical software used to profitably fill unused capacity. 56. Which of the following statements about yield management systems (YMS) is true? A. The first use of YMS was in the U.S. car industry as it looked for ways to compete with imports. B. YMS eliminate the problem of simultaneous production and consumption from services. C. YMS cannot be used by any other businesses but services. D. YMS are complex pricing systems used to set equilibrium pricing points. E. YMS are mathematically complex systems to make use of underutilized capacity and reduce the cost of perishability. Answer: E Rationale: YMS was first used in the airline industry, but it is now used by automobile manufacturers to make use of underutilized capacity. 57. Chad has calculated the sales volume at which his lemonade stand’s costs equal revenue. Over dinner, he announced to his family that he only needed to sell 50 glasses of lemonade at $5 per glass to cover all his costs (such as lumber and nails for the stand, lemons, and sugar). Which important factor has Chad excluded from his analysis? A. Fixed and variable cost determination B. Consumer demand C. Target return pricing D. Break-even analysis E. Market share Answer: B Rationale: Chad’s analysis only includes company costs and does not consider consumer demand. 58. Total variable costs divided by quantity of output equals: A. average total cost B. mean intermittent cost C. fixed cost D. marginal cost E. average variable cost Answer: E Rationale: This is the definition of average variable cost. 59. The two types of costs a marketer needs to consider when setting prices are: A. primary and secondary. B. variable and fixed. C. marginal and absolute. D. short term and long term. E. elastic and inelastic. Answer: B Rationale: A variable cost is a cost that varies with changes in the level of output (such as cost of materials), whereas a fixed cost does not change as output is increased or decreased (such as rent). 60. A cost that changes with the level of output is called a(n) _____ cost. A. liquidity B. variable C. fixed D. asset E. elastic Answer: B Rationale: An example of a variable cost is the cost of materials. 61. Which of the following is most likely to be a variable cost for an Internet retailer that sells spices, herbs, and seasonings to consumers? A. Annual lease on mixer used to blend seasonings B. Executive salaries C. Rent for building where spices and herbs are repackaged for consumers D. Workers’ insurance E. Postage for shipping spices and herbs Answer: E Rationale: Postage is the only item that varies depending upon the amount of units sold. 62. For a nail salon, the costs associated with the purchase of nail polish and other products like nail polish remover, sterilized equipment, laundry service for the towels, and the beverages given to customers, are all examples of _____ costs. A. marginal B. variable C. fixed D. promotional E. liquidity Answer: B Rationale: A cost that changes with the level of output is called a variable cost. 63. _____ costs do not change as output is increased or decreased. A. Asset B. Variable C. Fixed D. Symmetrical E. Status quo Answer: C Rationale: This is the definition of fixed costs. 64. Central Bark is a dog resort where pets are pampered. Which of the following is the BEST example of one of its fixed costs? A. Payment on the building used by Central Bark B. Dog biscuits C. Dog collars and leashes D. Bubble bath E. Advertisements in local magazines Answer: A Rationale: The payment on the building remains the same, no matter how many dogs are visit the resort. 65. Mitch owns an accounting agency. The monthly payment on the land he purchased for his business, the mortgage on his small office building, and his business license are all examples of _____ costs. A. marginal B. variable C. fixed D. promotional E. demand Answer: C Rationale: Fixed costs do not change as output changes. 66. _____ cost is the change in total costs associated with a one-unit change in output. A. Variable B. Intermittent C. Elastic D. Marginal E. Flex Answer: D Rationale: This is the definition of marginal cost. 67. Monthly output at Leisure-Time, Inc. changed from 12 to 13 prefabricated gazebos, and the total costs changed from $9,000 to $10,500. What is the marginal cost for this company? A. $1,500 B. $2,000 C. $1,200 D. $10,000 E. $12,000 Answer: A Rationale: Marginal cost is the change in total costs associated with a one-unit change in output. 68. When a seller determines the selling price by adding to cost an amount for profit and expenses not previously accounted for, the seller is using _____ pricing. A. profit maximization B. demand-oriented C. break-even D. target return E. markup Answer: E Rationale: Markup pricing does not directly analyze the costs of production; rather, is uses the cost of buying the product from the producer, plus amounts for profit and for expenses otherwise not accounted for. 69. The most popular method used by wholesalers and retailers in establishing a sales price is _____ pricing. A. markup B. status quo C. formula D. marginal revenue E. break-even Answer: A Rationale: Markup pricing does not directly analyze the costs of production; rather, is uses the cost of buying the product from the producer, plus amounts for profit and for expenses otherwise not accounted for. 70. Cowboy Malone’s Electric City pays a wholesaler $700 for a television and sells it to a customer for $1,500. The markup on the television is: A. $240 B. $160 C. $700 D. $800 E. $1,500 Answer: D Rationale: Markup is selling price minus cost: $1,500 – $700 = $800. 71. An office supply store can buy a desk for $300. If the store owner sells the desk for $450, what is the markup based on cost? A. 15 percent B. 20 percent C. 25 percent D. 33 percent E. 50 percent Answer: E Rationale: Price – Cost = Markup $450 – $300 = $150 $150 ÷ $300 = 50% markup 72. An office supply store can buy a desk for $300. If the store owner sells the desk for $450, what is the markup based on the selling price? A. 15 percent B. 20 percent C. 25 percent D. 33 percent E. 50 percent Answer: D Rationale: Price – Cost = Markup $450 – $300 = $150 $150 ÷ $450 = 33% markup 73. The difference between the retailer’s cost and the selling price is the: A. gross margin. B. markup percentage. C. profit. D. keystone. E. breakeven profit. Answer: A Rationale: Gross margin is the amount added to cost to determine price. 74. The owner of specialty kitchen retail store wants to determine what price she should put on a set of mixing bowls. They cost her $7. She desires a markup of 30 percent based on selling price. Which of the following is closest to the price she should charge her customers? A. $19 B. $12 C. $15 D. $10 E. $18 Answer: D Rationale: When desired markup is based on selling price, then selling price can be calculated as follows: Retail price = Cost ÷ (1 – Desired return on sales). 75. _____ is the practice of marking up prices by 100 percent (or doubling the cost to set the selling price). A. Margin pricing B. Key stoning C. Mark-on adding D. Formula doubling E. Symmetrical pricing Answer: B Rationale: This is the definition of key stoning. 76. Key stoning is: A. the practice of marking up prices by 100 percent. B. a method used for determining the point of elasticity. C. a plan for reducing marginal costs. D. the practice of maintaining variable costs at one-half of total fixed costs. E. a method of changing consumers’ perceptions about price. Answer: A Rationale: Key stoning simply doubles the cost. 77. The Nest is a retail store owned and operated by an interior designer. The markup on all items in the store is 100 percent over cost (or double the cost). In this case, we would say the designer uses: A. key stoning. B. target ROI pricing. C. break-even pricing. D. marginalizing. E. double sourcing. Answer: A Rationale: Key stoning is the practice of marking up prices by 100 percent (or doubling the cost to set the selling price). 78. Profit maximization occurs when: A. total costs equals average fixed revenue. B. average variable costs are larger than average total costs. C. total costs equal total variable costs. D. marginal variable costs equal average revenues. E. marginal revenue equals marginal cost. Answer: E Rationale: As long as the revenue of the last unit produced and sold is greater than the cost of the last unit produced and sold, the firm should continue manufacturing and selling the product, but maximum profit occurs when marginal revenue equals marginal cost. 79. _____ is the extra revenue associated with selling an additional unit of output. A. Average revenue B. Marginal revenue C. Marginal cost D. Net profit E. Average variable cost Answer: B Rationale: Marginal revenue is also defined as the change in total revenue with a one-unit change in output. 80. As long as the revenue of the last unit produced and sold is greater than the cost of the last unit produced and sold, a firm should: A. continue manufacturing. B. not use formula pricing. C. continue using price equilibrium. D. consider using sales maximization pricing. E. reach its break-even point very shortly. Answer: A Rationale: Diminishing returns have not set in, so the firm should continue manufacturing. 81. The point at which marginal cost and marginal revenue are equal always results in: A. maximization of elasticity. B. maximization of revenue. C. maximization of costs. D. maximization of profits. E. break-even equilibrium. Answer: D Rationale: Until the point where MR = MC, each unit of sales has contributed to additional profit; therefore, profit, not revenue or costs, has been maximized at MR = MC. 82. _____ determine what sales volume must be reached before the company’s total revenue equals total costs and no profits are earned. A. Marginal revenue estimates B. Price equilibrium analyses C. Break-even analyses D. Average total cost (ATC) figures E. Marginal costs of goods sold Answer: C Rationale: At the break-even point, costs are equal to revenue, and profit is zero. 83. The typical break-even model assumes a given fixed cost and a: A. variable per unit cost. B. constant inventory turnover. C. markup cost attained through key stoning. D. constant production schedule. E. constant average variable cost. Answer: E Rationale: Break-even quantity = Total fixed costs ÷ (Price – Average variable cost). 84. Fixed cost contribution equals: A. price times the average fixed cost. B. price plus the average variable cost. C. average variable cost plus average fixed cost. D. break-even quantity times price. E. price minus the average variable cost. Answer: E Rationale: Fixed cost contribution is what is left over after variable costs are covered, so it is equal to price minus the average variable cost. 85. Your Memory Lane creates custom art prints that use graphs and icons in a street scene to commemorate special occasions. Suppose that Your Memory Lane has priced its product at $350 per print. Further, it has determined that the company’s fixed cost is $12,500, with average variable costs per print of $250. What is the fixed cost contribution per print? A. $225 B. $100 C. $605 D. $2 E. $1 Answer: B Rationale: Fixed cost contribution is the price minus the average variable cost: $350 – $250 = $100. 86. Your Memory Lane produces custom-made art prints that include graphics and icons to celebrate life’s special moments. For example, on his wedding anniversary, David had an art print produced that celebrated highlights of his ten years with his wife, Kathy. Suppose that Your Memory Lane sells the custom artwork for $500. It estimates its average variable costs to be $200 per unit produced. It figures its fixed costs to be $900,000 per year. How many prints does it have to sell to break even? A. 2,000 prints B. 1,200 prints C. 3,000 prints D. 2,500 prints E. 6,000 prints Answer: C Rationale: Break-even quantity equals the total fixed costs ($900,000) divided by the fixed cost contribution per unit ($500 – $200 = $300). 87. Pet’s Eye View Digital Camera is a small, durable digital camera that pet owners can clip to their pets’ collars. A programmable timer takes pictures every few minutes, recording a photographic diary of the pet’s day. The camera sells for $25. The average variable cost for each camera is $10 and the total annual fixed costs for plant operation are $45,000. What is the break-even point in units? A. 1,800 B. 2,500 C. 3,000 D. 4,500 E. 5,000 Answer: C Rationale: Break-even quantity equals the total fixed costs ($45,000) divided by the fixed cost contribution per unit ($25 – $10 = $15). 88. Regency, Inc. makes disposable cap and gown sets for graduations. Each cap and gown set sells for $15. The average variable cost for manufacturing ten cap and gown sets is $100. Total fixed costs for the year equal $65,000. Calculate the break-even point in units. A. 650 B. 765 C. 1,300 D. 4,334 E. 13,000 Answer: E Rationale: Break-even point = $65,000 ÷ [15 – (100 ÷ 10)] = 13,000 89. Ceylon Express sells bottled pasteurized tea to retailers. It has the following revenues and costs: What is the annual break-even point in units for the company? A. 50,000 B. 250,000 C. 100,000 D. 166,667 E. 500,000 Answer: B Rationale: Break-even quantity is the total fixed costs ($50,000.00) divided by fixed cost contribution per unit ($0.20). 90. Which of the following statements describes a limitation associated with break-even analysis? A. It is sometimes difficult to ascertain whether a cost is fixed or variable. B. It requires the calculation of marginal revenue. C. It strictly considers demand. D. It assumes variable cost per item, which is difficult to calculate. E. It can only be expressed as a break-even point in dollar amounts. Answer: A Rationale: Not all costs are easily categorized because a cost may be fixed when viewed in the short term but variable when considered over a longer period of time. 91. Which of the following statements about pricing strategies throughout the product life cycle is NOT true? A. During product decline, prices may also decline until there is only one competitor left in the market. B. Price increases during the maturity stage are cost initiated instead of demand initiated. C. The maturity stage often brings about price decreases. D. Prices stabilize when the product enters the growth stage. E. With inelastic demand, price will be set low during the introduction stage. Answer: E Rationale: With inelastic demand, prices are set high at introduction. 92. Prices generally begin to stabilize: A. as a product enters the growth stage. B. when a product if first introduced onto the market. C. as a result of key stoning. D. when a product enters the decline stage of the life cycle. E. in hotly competitive markets. Answer: A Rationale: As the product enters the growth stage, prices generally begin to stabilize. 93. When Apple, Inc. developed and introduced the iPad, it was unique as it essentially combined a touch-based portable computer, a wireless marketplace, and an eBook reader. As such, in the short run, it seemed that demand for the product would be inelastic, with no real existing competition. The recommend pricing strategy in such a situation would be: A. low initial price, rising slightly when entering the growth stage. B. high initial price, falling slightly when entering the growth stage. C. high price, continuing through growth and maturity. D. low price, continuing through growth and maturity. E. low price initially, rising constantly through growth and into maturity. Answer: B Rationale: A high initial price is used when a new product faces little competition, needs to recoup research and development costs, and has inelastic demand. Prices will fall slightly when entering the growth stage. 94. As a product enters the growth stage, prices generally begin to stabilize. One reason for this is that: A. the product has begun to appeal to a broader market. B. most competitors have been eliminated from the market. C. manufacturers hope to recover their development costs quickly. D. the available supply decreases. E. All of the above are correct. Answer: A Rationale: Other reasons include competitors entering the market and economies of scale. 95. Kroger supermarkets will place well-known brands on the shelves at high prices while offering their own Kroger brand at lower prices. This practice is an example of: A. illegal pricing. B. selling against the brand. C. price pressurization. D. brand cutting. E. private label cannibalization. Answer: B Rationale: Selling against the brand with private labels causes sales of the higher-priced brands to decline. 96. Manufacturers can do all of the following to regain some control over the price their products are sold for at the retail level EXCEPT: A. require resellers to maintain prices in line with competitors’ prices. B. developing brand loyalty in consumers by delivering quality and value. C. avoiding doing business with price-cutting discounters. D. franchising. E. using an exclusive distribution system. Answer: A Rationale: Manufacturers can also package merchandise with the selling price marked on it or place goods on consignment. 97. Shopping bots: A. encourage a more creative use of advertising. B. link manufacturers, suppliers, and customers. C. create opportunities for prestige pricing. D. search the Web for the best price. E. create inelastic demand. Answer: D Rationale: Bot is short for robot, and shopping bots theoretically give pricing power to the consumer. 98. Which of the following statements about the Internet is true? A. The Internet has shifted all shopping power to consumers. B. Consumer reviews tend to be equal in quality. C. Business-to-business auctions on the Internet are likely to be more important than consumer auctions in the future. D. Fraud is not a problem on the Internet. E. Extranets are programs that search the Internet for the best price for a particular product. Answer: C Rationale: The Internet has shifted some, but not all, shopping power to consumers. Consumer reviews vary in quality. Fraud is a huge problem. 99. During the hot summer months, or the week before a new class starts if there is still space available, the Nick Price golf school in Orlando, Florida, offers a 25 percent reduction to get golfers during the off-season or those making a last-minute decision. This is an example of pricing strategy used as a(n): A. distribution tool. B. price enhancer. C. product strategy. D. direct sales tool. E. promotion strategy. Answer: E Rationale: Price is often used as a promotional tool to increase consumer interest. 100. Many consumers, especially when faced with an uncertain purchase decision, think that a high price: A. is a signal of quality. B. is an indication that consumers are being ripped off. C. will always lead to major price discounts to wholesalers and retailers that distribute it. D. is a sign of the company’s overall market share. E. indicates that the brand was slipping into the decline stage of the product life cycle but has had a sudden resurgence of growth. Answer: A Rationale: Numerous studies have shown that consumers equate high price with good quality. 101. David likes New Balance running shoes. However, when he stopped by the Foot Locker to buy a new pair of running shoes, he noticed that Nike had a new pair of running shoes that cost $350. To David, the higher price of the Nike shoe indicated that it would be a better pair of running shoes. This is an example of: A. premium pricing. B. price lining. C. prestige pricing. D. exclusive pricing. E. selective pricing. Answer: C Rationale: Prestige pricing is charging a high price to help promote a high-quality image. 102. When the Apple iPhone 3G was introduced, users could buy the “I Am Rich” app for a price of $1,000. The app did nothing but display a red gem on the iPhone’s screen. The description of the app stated that this red icon would remind you (and others you show it to) “that you were rich enough to afford this.” Six of the applications were sold before Apple, Inc. removed the app from iTunes. At the $1,000 price, the author of the app was using _____ pricing as part of his marketing approach. A. snob appeal B. prestige C. exclusive D. selective E. unique Answer: B Rationale: Prestige pricing strategy sets high prices to connote high product quality and exclusiveness. 103. Marketing managers who attempt to raise the quality image of their product by selling it at high prices are following a(n) _____ strategy. A. profit maximization B. market share C. maintained markup pricing D. prestige pricing E. investment asset Answer: D Rationale: Prestige pricing strategy sets high prices to connote high product quality. 104. Laurie knows little about cooking and does not want to spend the time to learn how to make a quiche. However, she has been asked to bring a quiche to an office retirement party. Not wanting to make a poor choice, she is likely to: A. intuitively make the right choice. B. avoid making a decision by not attending the party. C. buy the most expensive pre-made quiche (perhaps paying too much), guessing that the price is related to quality. D. research the product and buy the least expensive frozen quiche she can find. E. buy the least expensive frozen quiche because most consumers feel that price is not directly related to quality. Answer: C Rationale: Most consumers equate price and quality. 105. When Jerry took delivery of his brand new (and very expensive) Jaguar automobile, he was filled with pleasure and excitement. This is an example of the _____ effect associated with the price-quality relationship. A. durability B. allocative C. prestige D. hedonistic E. performance Answer: D Rationale: Hedonistic consumption refers to pursuing emotional responses associated with using a product, such as pleasure, excitement, arousal, and fun. 106. The dimensions of quality that are important to consumers include: A. versatility. B. serviceability. C. performance. D. ease of use. E. all of these choices. Answer: E Rationale: Durability and prestige are other dimensions. Tesla Motors “Going green” doesn’t have to be boring. The Tesla Roadster Sport is an electric car that goes from 0 to 60 in four seconds and drives more like a race car than an environmentally friendly ride. But that level of performance will set you back $128,500. As of 2009, Silicon Valley–based Tesla Motors, Inc. was the only company offering highway-compatible electric cars. Most Roadster Sport buyers are car enthusiasts and are buying them for the “fun toy” aspect of having an electric car rather than for environmental reasons. 107. Refer to Tesla Motors. The price of the Roadster was set so that the marginal revenue equals marginal cost. This represents a _____ approach. A. profit maximization B. market share pricing C. demand-oriented pricing D. sales maximization E. status quo pricing Answer: A Rationale: Profit maximization means setting the price so that marginal revenue equals marginal cost. 108. Refer to Tesla Motors. If Tesla had assets of $5 million and net profits after taxes of $550,000, what is Tesla’s return on investment? A. 1 percent B. 9 percent C. 11 percent D. $14,135 E. $4,450,000 Answer: C Rationale: Return on investment = Net profit after taxes ÷ Total assets OR Return on investment = $550,000 ÷ $5,000,000 109. Refer to Tesla Motors. What is the fixed cost contribution for the Roadster given average variable costs of $50,500? A. $50,500 B. $78,000 C. $128,500 D. $179,000 E. $500,000 Answer: B Rationale: Fixed cost contribution is the price minus the average variable cost: $128,500 – $50,500 = $78,000. 110. Refer to Tesla Motors. If total fixed costs are $23,400,000 and the average variable cost is $50,500, how many Roadsters must Tesla sell to break even? A. 130 B. 182 C. 250 D. 300 E. 463 Answer: D Rationale: Breakeven quantity = Total fixed costs ÷ (Price – Average variable costs) OR Break-even quantity = 23,400,000 ÷ (128,500 – 50,500) OR Break-even quantity = Total fixed costs ÷ Fixed cost contribution (23,400,000 ÷ 78,000) 111. Refer to Tesla Motors. Say Tesla set the price of the Roadster high because the company wanted to promote a high-quality image. What type of pricing does this represent? A. Prestige pricing B. Elite pricing C. Penetration pricing D. Quality pricing E. Complete pricing Answer: A Rationale: Prestige pricing is charging a high price to help promote a high-quality image. Specialty Cakes Imagine that you’re planning an after-symphony fund-raising party, and you need a life-size grand piano cake. Or, you are a developer proposing a new shopping center to a group of investors, and you want to serve a cake shaped like an architectural rendition of the center. Is this impossible? No, you just need to contact Cecilia Villaveces Cakes. She actually built a life-size grand piano for a gala in Macon, Georgia. You can expect to pay anywhere from $75 to $10,000 for one of Cecilia’s artistic creations, depending on complexity of design and size. She uses only the best ingredients, and no two cakes are ever quite alike. 112. Refer to Specialty Cakes. Although many factors determine the prices charged by Cecilia Villaveces Cakes, the two primary determinants are: A. costs of manufacturing and distribution costs. B. stage of the product life cycle and costs to the consumers. C. the demand for the good and the cost to the seller. D. demand by the consumer and perceived quality. E. distribution and promotion strategies used by the cake maker. Answer: C Rationale: If there was reduced demand, then Cecilia would have to lower prices. Also, she must charge for the time, energy, and resources that go into each cake. 113. Refer to Specialty Cakes. Many party planners in the Southeast will only use Cecilia Villaveces Cakes at their parties––no matter what the price is. They know that Cecilia’s cakes can make a party a success. Moreover, the cakes are what people remember most about the parties. From this description, you should assume Cecilia Villaveces Cakes have a(n): A. elastic demand. B. unitary elasticity. C. inelastic supply. D. inelastic demand. E. elastic supply. Answer: D Rationale: Price increases do not decrease demand for cakes. 114. Refer to Specialty Cakes. Which of the following is the BEST example of a fixed cost for Cecilia Villaveces Cakes? A. Eggs, butter, sugar B. Delivery costs C. Part-time employees D. Electricity consumption E. Food preparation licenses Answer: E Rationale: Delivery costs, electricity consumption, and use of part-time employees will vary according to the job. 115. Refer to Specialty Cakes. Which of the following is the BEST example of a variable cost for Cecilia Villaveces Cakes? A. Life insurance on Cecilia B. Flour and sugar C. Ovens used for cooking cakes D. Business licenses E. Interest payments to the bank Answer: B Rationale: Only the consumption of flour and sugar would vary from cake to cake. 116. Refer to Specialty Cakes. To set the price of her cakes, Cecilia simply doubles her costs, which often include several hours of labor and expensive raw materials. This method of price setting is called: A. mark-on pricing. B. premium pricing. C. key stoning. D. add-on pricing. E. superimposed pricing. Answer: C Rationale: The practice of marking prices up 100 percent is called key stoning. 117. Refer to Specialty Cakes. There are many occasions for which people may need to buy a cake, but most people do not have the time or interest to learn about cakes and their bakers. These people who do not know about the quality of the Cecilia Villaveces Cakes might choose them because they: A. equate price and quality. B. know cakes are in the mature stage of their product life cycle. C. realize that this is a monopolistic industry. D. believe that there is not a relationship between price and quality. E. desire value-added services. Answer: A Rationale: Most consumers equate price and quality. American Girl Doll The American Girl catalog began as a concept to introduce today’s girls to those who lived in the past. Each historically accurate doll is carefully crafted and dressed and has books to describe her life. For example, Kristen is an 1854 pioneer girl who is growing up in Minnesota. Her story begins with her long sea voyage from Sweden. The basic doll, dressed in a calico dress and striped apron plus the hardcover story of how she got to Minnesota, costs $90.00. Six more hardback books of Kristen’s life are available for $74.95. Kristen’s nightgown costs $20.00, and a matching one for the doll owner is an additional $38.00. Buy both together and the price is only $50.00. A hand-painted wooden bed and trunk for Kristen are available for $213.00. Shipping costs vary with the price of the merchandise ordered. 118. Refer to American Girl Doll. What is the revenue to American Girl if it sells 20 basic Kristen dolls? A. $90.00 B. $100.95 C. $427.95 D. $1,800.00 E. $3,600.00 Answer: D Rationale: Revenue equals price times number of items sold. 119. Refer to American Girl Doll. American Girl is the primary seller of historically accurate dolls with accompanying books in a market where there is very little competition. It has no cash flow problems and is not interested in maximizing its sales. From this information, you should know American Girl has _____ pricing objectives. A. status quo B. psychological C. profit-oriented D. sales-oriented E. supply-derived Answer: C Rationale: Because it has no competitors to speak of, status quo objectives are unlikely. It is not interested in maximizing its sales, so sales-oriented objectives are also not likely. 120. Refer to American Girl Doll. The popularity of the American Girl dolls is so great that an increase in the price of the basic Kristen doll and books by 5 percent will not significantly affect the demand for the product. The means that the demand for the American Girl doll is: A. elastic. B. derived. C. a multiplier. D. inelastic. E. symmetrical. Answer: D Rationale: Inelastic demand means that an increase or decrease in price will not significantly affect demand for the product. 121. Refer to American Girl Doll. Based on the information in the narrative, which of the following factors is most likely to affect the elasticity of demand for the doll? A. The absence of substitutes B. The existence of complementary products C. The price relative to purchasing power D. Product durability E. A variety of alternative uses for the product Answer: A Rationale: There is nothing like the American Girl doll in terms of historical accuracy. 122. Refer to American Girl Doll. In terms of the costs of producing the doll and its accessories, the salary of the graphic designer who does the layout for the American Girl catalog is a(n): A. markup cost. B. variable cost. C. fixed cost. D. derived cost. E. elastic cost. Answer: C Rationale: Salaries are considered fixed costs. 123. Refer to American Girl Doll. In terms of producing the doll and its accessories, the calico fabric used to make Kristen’s dress is an example of a(n): A. markup cost. B. variable cost. C. fixed cost. D. derived cost. E. elastic cost. Answer: B Rationale: How much fabric used depends on how many dolls made. 124. Refer to American Girl Doll. You can buy a doll at Walmart for $5.99. The high price of the American Girl doll is used to promote a high-quality image. American Girl uses a _____ pricing strategy. A. markup B. demand-based C. prestige D. penetration E. supply-derived Answer: C Rationale: Prestige pricing is charging a high price to help promote a high-quality image. Smelly Fruit At first glance, there is little to like about the durian. The durian is a fruit popular in Thailand that is spiky outside and stinky on the inside. When confronted with the durian for the first time, the Wall Street Journal recently reported that westerners often describe its distinctive sulphurous smell with words like stinky socks and manure. However, the durian is so popular in Thailand that one variety of the durian fruit, called the Kan Yao, has been selling for as high as $200. Even at that price, supply of the Kan Yao cannot keep up with demand. There are approximately 30 varieties of the durian grown in Thailand, with the most plentiful selling in the $15 range. The yellow flesh of the durian, the part you eat, has very powerful smell but possesses a sweet, nutty taste that Thais cannot seem to get enough of at any price. 125. Refer to Smelly Fruit. If it cost a Thai farmer $100 to produce and $25 to market the Kan Yao durian that she sells for $200 at the marketplace, her revenue, for each durian sold, would be: A. $125 B. $200 C. $25 D. $100 E. $325 Answer: B Rationale: Revenue is the price charged to customers multiplied by the number of units sold (in this case, one). 126. Refer to Smelly Fruit. Suppose that a Thai farmer sells ten Kan Yao durians in the marketplace at the going rate of $200 each. If it cost a Thai farmer $125 to produce and market the Kan Yao durian that she has sold, the difference between these two numbers ($75), times the number sold (ten), represents the farmer’s: A. ROI B. revenue C. profit D. returns E. COGS Answer: C Rationale: What’s left over after covering all costs would be the farmer’s profit. 127. Refer to Smelly Fruit. Suppose that you have decided to buy land in Thailand and become a durian producer. You see that the customary price for a Kan Yao is $200, so that is the price you decide to charge for your durian crop. This suggests you are using a _____ approach to setting your price. A. profit maximization B. market share C. return on investment (ROI) D. sales maximization E. status quo Answer: E Rationale: Status quo pricing seeks to maintain existing prices or to meet competition’s price. 128. Refer to Smelly Fruit. At $200 per Kan Yao, demand for the fruit appears to be higher than supply. Suppose that at a price of $225, the amount demanded exactly meets the amount farmers are willing and able to supply. In this case, the $225 price would be considered the _____ price. A. price equilibrium B. sales maximization C. profit maximization D. ROI maximization E. yield management Answer: A Rationale: When demand and supply are equal, you have met the price equilibrium price. 129. Refer to Smelly Fruit. Over the past two years, the price for Kan Yao durian fruit has increased by 50 percent. If the amount sold has remained almost constant, we would say that demand is: A. elastic B. inelastic C. unitary D. highly elastic E. moderately elastic Answer: B Rationale: Inelastic demand means that when prices go up it does not significantly affect sales. 130. Refer to Smelly Fruit. The durian fruit is a unique product. To many people in Thailand, no other fruit tastes or smells anything like the durian. Its uniqueness, in the eyes of the customer, would tend to have which of the following? A. It would have little effect. B. It would tend to make the durian more price elastic. C. It would tend to make the durian more price inelastic. D. It would tend to raise the price in comparison to purchasing power. E. It would tend to impact the durian’s stage in the PLC. Answer: C Rationale: The lack of availability of substitutes leads to inelastic demand. ESSAY 1. Define price and discuss the two roles price plays in the evaluation of product alternatives. Answer: Price is that which is given up in an exchange to acquire a good or service. Price plays two roles in the evaluation of product alternatives: as a measure of sacrifice and as an information cue. Since price is “that which is given up,” it means what is sacrificed to get a good or service. In the United States, that usually means money, but it can mean other things as well. It may also be time lost while waiting to acquire the good or service. The information effect of price implies that many consumers use price as an indication of quality. That is, higher quality equals higher price. The information effect of price may also extend to favorable price perceptions by others because higher prices can convey the prominence and status of the purchaser to other people. 2. One of the most stressful and pressure-filled tasks of the marketing manager is attempting to set the right price. Specify three aspects of the current pricing environment in consumer markets that have contributed to the difficulty in setting correct prices. Answer: Five factors in the consumer products market are listed in the text: (1) confronting a flood of new products, potential buyers carefully evaluate the price of each one against the value of existing products; (2) the increased availability of bargain-priced private and generic brands has put downward pressure on overall prices; (3) many firms are trying to maintain or regain their market share by cutting prices; (4) the Internet has made comparison shopping easier; and (5) the United States was in a recession from late 2007 until late 2009. 3. List the three categories of pricing objectives and then two specific strategies in each category that a marketer could implement to achieve those objectives. Answer: PROFIT-ORIENTED PRICING OBJECTIVES include: • profit maximization • satisfactory profits • target return on investment SALES-ORIENTED PRICING OBJECTIVES include: • market share • sales maximization (dollar or unit sales) STATUS QUO PRICING OBJECTIVES include: • maintaining the existing price • meeting the competition 4. Last quarter, Abingdon Company sold 1,000 decorative decals for $1 each; Cedar Decaliania sold 200 decorative decals at $4 each; Creative Decals sold 500 decals at $2 each; and Donnelly, Inc. sold 300 decals for $4 each. Assuming that the four companies are the only firms competing in the decorative decal market, calculate unit and dollar market share for each company for last quarter. For each company, which market share figure might be used in an advertisement for that company? Answer: The following calculation table shows the resultant unit and dollar shares. Market share should be expressed in percentage points. Firms often state market share in terms that are most flattering to the company. Abingdon would express unit shares in an advertisement, while Cedar Decaliania and Donnelly would use dollar shares. Creative Decals’ market share is 25 percent for either calculation. See Exhibit 19.1. 5. List the two primary determinants of price. What other factors can affect price setting? Answer: The price established depends primarily on (1) DEMAND for the good or service and (2) the COST to the seller for that good or service. Other factors that would influence price include distribution strategies, promotion strategies, perceived quality, demands of large customers, the Internet, and the stage of the product life cycle. 6. The daily demand for bottled water is 35 bottles when the price is set at $1. However, if the price is raised to $5, the demand is only five bottles. The bottled water producer is willing to supply 40 bottles if the price is set at $5 per bottle but will only supply 10 bottles if the price is set at $2. Draw the supply and demand curves for the water bottles on the graph below. Label each curve and each axis. At what level does equilibrium occur? What are the areas of surplus and shortage? Answer: The vertical axis should be labeled as price, and the horizontal axis should be labeled as quantity. The demand curve should show a negative slope, crossing the positively sloped supply curve at the equilibrium point of $3 and 20 units. Surplus occurs in the area between the curves and above the equilibrium point, while shortage occurs below the equilibrium point. 7. Define elasticity of demand and compare and contrast the three types of demand: elastic, inelastic, and unitary. What would the demand curve for elastic and inelastic demand look like when graphed? Answer: Elasticity of demand refers to consumers’ responsiveness or sensitivity to changes in price. ELASTIC DEMAND occurs when consumers buy more or less of a product when the price changes. The demand curve is almost horizontal or exactly horizontal if demand is perfectly elastic. INELASTIC DEMAND means that an increase or a decrease in price will not significantly affect demand for the product. The demand curve is almost vertical or exactly vertical if demand is perfectly inelastic. UNITARY ELASTICITY exists when the increase in sales exactly offsets a decrease in prices, so total revenue remains the same. 8. List five factors that affect elasticity of demand and briefly describe how each affects demand. Answer: AVAILABILITY OF SUBSTITUTES. When many product substitute products are available, the consumer can easily switch from one product to another. This makes demand more elastic. PRICE RELATIVE TO PURCHASING POWER. If a price is so low that it is an inconsequential part of an individual’s budget, demand will be inelastic. PRODUCT DURABILITY. Consumers often have the option of repairing durable products rather than replacing them, thus prolonging their useful life. In other words, people are sensitive to the price increase, and demand is elastic. A PRODUCT’S OTHER USES. The greater the number of different uses for a product, the more elastic demand tends to be. As price varies for a product with a wide variety of applications, substitutability becomes an issue. RATE OF INFLATION. Recent research has found that when a country’s inflation rate (the rate at which the price level is rising) is high, demand becomes more elastic. In other words, rising price levels make consumers more price sensitive. 9. Explain yield management systems (YMS) and discuss the types of industry where they are most appropriate. Answer: Yield management systems (YMS) are a technique for adjusting prices that use complex mathematical software to profitably fill unused capacity by discounting early purchases, limiting early sales at these discounted prices, and overbooking capacity. YMS are used to raise prices to maximize revenues. They were first used in the service industries—specifically the airline industry—but have been recently discovered by manufacturers and others as a way to make more efficient use of resources. 10. What are the problems associated with the use of a cost-based pricing strategy? What contribution does cost make to the setting of prices? Answer: Setting prices based solely on costs ignores demand and other important factors such as marketing mix components or consumer needs and wants. Prices determined strictly on the basis of cost may be too high for the target market, thereby reducing or eliminating sales. Cost-based prices may also be too low, causing the firm to earn a lower return than it should. Costs play an important role in price setting, however. Costs serve as floor below which a good or service must not be priced in the long run. 11. What is the difference between fixed and variable costs? Give examples of each type of cost. Answer: FIXED COSTS are those expenses of the firm that are stable and do not change with the level of output. Examples include rent and executive salaries. VARIABLE COSTS are those expenses of the firm that vary directly with the level of output. Examples of variable costs associated with output include cost of materials, direct labor, and packaging. 12. Calculate answers for the following scenarios if retailer markups are based on their selling price: A. A retailer sells a set of measuring cups for $2.50 after adding $0.50 to the original cost. What is the markup percentage? B. The cost of a food blender for the retailer is $40 and the retailer applies a markup of $60. What is the retail markup percentage? C. A retailer marks up all products by 20 percent. If a set of glasses costs the retailer $10, what will be the final selling price? D. A retailer marks up all products by 75 percent. If the selling price of a set of plastic bowls is $4, what was the cost to the retailer? Answer: The dollar markup is calculated as selling price minus cost, and percentage markup can be calculated by dividing dollar markup by selling price. 13. What is marginal revenue? Based on the provided schedule from the Chesapeake Bay Swing Company, at which quantity should Chesapeake Bay stop producing additional swings? Answer: Marginal revenue is the extra revenue associated with selling an extra unit of output. As long as the revenue of the last unit produced and sold is greater than the cost of the last unit produced and sold, the firm should continue manufacturing. The student should find the point in the schedule where marginal revenue is equal to marginal cost, which is at five units. The firm would not stop producing at four units, even though the addition of the fifth unit did not add any profits. This is because the firm could not determine an increase or decrease in profits after the fourth unit until an additional unit had been produced. 14. What is a break-even point? The Catera Company makes and sells cotton candy machines. What is the break-even volume for Catera machines in units? Answer: A break-even point is that level of units sold at a certain price at which no profit or loss is incurred. Break-even analysis determines what sales volume must be reached for a product before the company breaks even (total costs are equal to total revenue).Using the break-even formula indicates that Catera must sell 800 cotton candy machines to break even. Fixed cost contribution = Selling price – Average variable cost Fixed cost contribution = $600 – $350 = $250 Break-even quantity = Total fixed costs ÷ Fixed cost contribution Break-even quantity = $200,000 ÷ $250 = 800 units 15. Name two advantages and two disadvantages associated with the use of break-even analysis. Answer: Advantages of using break-even analysis include that it (1) provides a quick estimate of how much the firm must sell to break even, (2) provides information about how much profit can be earned if a higher sales volume is obtained, and (3) reduces the dependence on marginal cost and revenue data, which are frequently unavailable. Disadvantages of using break-even analysis include that (1) it is difficult to know whether a cost is fixed or variable and (2) failure to account for the concept of demand. For example, a firm may not be able to sell the break-even number of units because demand may be limited to fewer units. 16. As a product moves through its life cycle, the demand for the product and the competitive conditions tend to change. For each stage in the product life cycle, discuss pricing strategies appropriate for that stage. Answer: INTRODUCTION. Management usually sets prices high during the introductory stage. One reason is that it hopes to recover its development costs quickly. In addition, demand originates in the core of the market (the customers whose needs ideally match the product’s attributes) and thus is relatively inelastic. GROWTH. As the product enters the growth stage, prices generally begin to stabilize for several reasons. First, competitors have entered the market, increasing the available supply. Second, the product has begun to appeal to a broader market, often lower-income groups. Finally, economies of scale are lowering costs, and the savings can be passed on to the consumer in the form of lower prices. MATURITY. Maturity usually brings further price decreases as competition increases and inefficient, high-cost firms are eliminated. The manufacturers that remain in the market toward the end of the maturity stage typically offer similar prices. At this stage, price increases are usually cost initiated, not demand initiated. DECLINE. The final stage of the life cycle may see further price decreases as the few remaining competitors try to salvage the last vestiges of demand. When only one firm is left in the market, prices begin to stabilize. In fact, prices may eventually rise dramatically if the product survives and moves into the specialty goods category. 17. Explain how the Internet and extranets affect price. In particular, how do shopping bots and business-to-business auction Web sites affect pricing? Answer: The Internet and extranets are linking people, machines, and companies around the globe—and connecting sellers and buyers as never before. These links are enabling buyers to compare products and prices, putting them in a better bargaining position. A shopping bot is a program that searches the Web for the best price for a particular item that you wish to purchase. Shopping bots theoretically give pricing power to the consumer. The business-to-business auction world is shifting from haggling over prices to niggling over parameters of the deal. Warranties, delivery dates, transportation methods, customer support, financing options, and quality have all become bargaining chips. 18. Discuss how consumers use the price–quality relationship to evaluate goods and explain how marketers can take advantage of this consumer response. Answer: Consumers tend to rely on price as an indicator of product quality; that is, a higher price indicates higher quality in the form of better materials, more careful workmanship, or higher service levels. Conversely, lower price indicates lower quality, as illustrated by the adage, “you get what you pay for.” Marketers can take advantage of the price–quality phenomenon by increasing the price of the product to enhance the image of their product. This is known as a prestige pricing strategy. Test Bank for MKTG Charles W. Lamb, Jr. Hair, Joseph F., Carl McDaniel 9781285091860
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