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Chapter 12 - Pricing Concepts and Management 1. Describe the eight stages of the process that marketers can use to establish prices. Answer: Before a product’s price can be set, an organization must determine the basis on which it will compete—whether on price alone or some combination of factors. There are eight stages that marketers can follow to establish prices. Stage 1 is developing a pricing objective that is compatible with the organization’s overall marketing objectives. Stage 2 entails assessing the target market’s evaluation of price. In Stage 3, marketers should examine a product’s demand and the price elasticity of demand. Stage 4 consists of analyzing demand, cost, and profit relationships—it is a necessary step in estimating the economic feasibility of various price alternatives. Stage 5 involves evaluating competitors’ prices, which helps determine the role of price in the marketing strategy. Stage 6 requires choosing a basis for setting prices. Stage 7 is selecting a pricing strategy, or determining the role of price in the marketing mix. Stage 8 involves determining the final price. This final step depends on environmental forces and marketers’ understanding and use of a systematic approach to establishing prices. These stages are not rigid, and not all marketers will follow all the steps. They are merely guidelines that provide a logical sequence for establishing prices. 2. What are some of the objectives a firm might hope to achieve when setting prices? Answer: The first step in setting prices is developing pricing objectives that form the basis for decisions for other stages of the pricing process. A firm’s objectives include survival, profit, return on investment, market share, cash flow, status quo, and product quality. Survival means temporarily setting prices low, even at times below costs, in order to attract more sales. Profit objectives tend to be set at levels that the owners and top-level decision makers view as satisfactory and attainable. Pricing to attain a specified rate of return on the company’s investment is a profit related pricing objective. A return on investment (ROI) pricing objective generally requires some trial and error. Firms establish pricing objectives to maintain or increase market share. They recognize that high relative market shares often translate into high profits. Some companies set prices so they can recover cash as quickly as possible. The use of cash flow and recovery as an objective oversimplifies the contribution of price to profits. A status quo pricing objective can reduce a firm’s risks by helping to stabilize demand for products. A high price on a product may have the effect of signalling to customers that the product is of a high quality. 3. How are pricing objectives similar to a corporation's overall goals? How are they different? Answer: Developing pricing objectives is an important task because they form the basis for decisions for other stages of the pricing process. Thus, pricing objectives must be stated explicitly and in measurable terms, and should include a time frame for accomplishing them. Marketers must ensure that pricing objectives are consistent with the firm’s marketing and overall objectives because pricing objectives influence decisions in many functional areas of a business, including finance, accounting, and production. A marketer can use both short- and long-term objectives and can employ one or multiple pricing objectives. 4. How can a marketer use product quality as a pricing objective to influence purchasing decisions? Answer: Some consumers are seeking less-expensive products and shopping more selectively, enabling some manufacturers and retailers to focus on the value of their products in communications with customers. Value is more than just a product’s price. It combines price with quality attributes, which customers use to differentiate between competing brands. Generally, consumers want to maximize the value they receive for their money. Consumers may even perceive products to have great value that are not the least expensive, such as organic produce, if they have desirable features or characteristics. Consumers are also generally willing to pay a higher price for products that offer convenience and time savings. Companies that offer both low prices and high quality have altered consumers’ expectations about how much quality they must sacrifice for low prices. Understanding the importance of a product to customers, as well as their expectations about quality and value, helps marketers correctly assess the target market’s evaluation of price. 5. Explain what is meant by price elasticity of demand. Answer: Price elasticity of demand provides a measure of the sensitivity of consumer demand for a product or product category to changes in price. Elasticity is formally defined as the percentage change in quantity demanded relative to a given percentage change in price. For a product with highly elastic demand, a relatively a small increase in price results in a huge change in quantity sold. Non-essential items or those with ready substitutes tend to have more elastic demand. If marketers can determine the price elasticity of demand for a product, setting a price is easier. By analysing total revenues as prices change, marketers can determine whether a product is price elastic. Total revenue is price multiplied by quantity. If demand is elastic, a shift in price causes an opposite change in total revenue: an increase in price will decrease total revenue, and a decrease in price will increase total revenue. The following formula determines the price elasticity of demand: price elasticity of demand = % change in quantity demanded/ % change in price. 6. What are the implications of a downward-sloping demand curve? Answer: Most firms face downward-sloping demand curves for their products. In other words, they must lower their prices to sell additional units. This situation means that each additional unit of product sold provides the firm with less revenue than the previous unit sold. Marginal revenue decreases as price decreases and quantity sold increases. Marginal revenue (MR) is the change in total revenue that arises from the sale of an additional unit of a product. Eventually, marginal revenue will reach zero, and the sale of additional units actually causes the firm to lose money. 7. What are the components of total cost? Give specific examples. Answer: Total cost is the sum of the average fixed costs and the average variable costs, multiplied by the quantity produced. The average total cost is the sum of the average fixed cost and the average variable cost. Marginal cost (MC) is the extra cost a firm incurs when it produces one additional unit of a product. 8. Why is the marginal revenue of a product important to the marketer? Answer: Marginal analysis examines what happens to a firm’s costs and revenues when production changes by one unit. Both production costs and revenues must be evaluated. Marginal revenue is the change in total revenue that arises from the sale of an additional unit of a product. Most firms face downward-sloping demand curves for their products. This situation means that each additional unit of product sold provides the firm with less revenue than the previous unit sold, marginal revenue decreases as price decreases and quantity sold increases. Eventually, marginal revenue will reach zero, and the sale of additional units actually causes the firm to lose money. Before the firm can determine whether a unit will be profitable, it must calculate costs and revenue, because profit equals revenue minus cost. If MR is the increase in revenue generated by the sale of a single additional unit of a product, and MC is the additional cost a single unit adds to a firm, subtracting MR from MC will tell us whether the unit is profitable. Any unit for which MR exceeds MC adds to a firm’s profits, and any unit for which MC exceeds MR subtracts from profits. 9. How might a marketer find information about a competitor's prices? Why is this information important? Answer: In most cases, marketers are in a better position to establish prices when they know the prices charged for competing brands. Learning competitors’ prices should be a regular part of marketing research. Some grocery and department stores even employ comparative shoppers who systematically collect data on prices. Companies may also purchase price lists from syndicated marketing research services. Even if a marketer has access to competitors’ price lists, they may not reflect the actual prices at which competitive products sell because negotiation is involved. Knowing the prices of competing brands is essential for a marketer. Regardless of a firm’s actual costs, it does not want to sell its product a great deal above competitors’ because products may not sell well, or a great deal below because customers may believe the product is of a low quality. Particularly in an industry in which price competition prevails, a marketer needs competitive price information to ensure that a firm’s prices are the same as, or slightly lower than, competitors’. In some instances, an organization’s prices are designed to be slightly above competitors’ prices, to lend an exclusive image. 10. Identify and describe the major factors that affect pricing decisions. Answer: Establishing prices involves selecting a basis for pricing: cost, demand, and/or competition. The appropriate pricing basis is affected by the type of product, the market structure of the industry, the brand’s market share position relative to competing brands, and customer characteristics. An organization generally considers at least two, or perhaps all three, dimensions. Firms must weigh many different factors when setting prices, including costs, competition, customer buying behavior and price sensitivity, manufacturing capacity, and product life cycles. 11. Explain differential pricing and then describe the four major types. Answer: Differential pricing means charging different prices to different buyers for the same quality and quantity of product. For differential pricing to be effective, the market must consist of multiple segments with different price sensitivities. Differential pricing can occur in several ways, including negotiated pricing, secondary-market pricing, periodic discounting, and random discounting. Negotiated pricing occurs when the final price is established through bargaining between a seller and a customer. Negotiated pricing occurs in a number of industries and at all levels of distribution. Secondary-market pricing means setting one price for the primary target market and a different price for another market. Often the price charged in the secondary market is lower. However, when the costs of serving a secondary market are higher than normal, secondary-market customers may have to pay a higher price. Periodic discounting is the temporary reduction of prices on a patterned or systematic basis. Random Discounting is employed to alleviate the problem of customers’ knowing when discounting will occur, by reducing the prices temporarily on a non-systematic basis. 12. Compare and contrast price skimming and penetration pricing. Answer: Price skimming is the strategy of charging the highest possible price for a product during the introduction stage of its life­cycle. A seller essentially “skims the cream” off the market, which helps a firm to recover the high costs of R&D more quickly. A danger is that a price skimming strategy may make a product appear more lucrative than it actually is to potential competitors. A firm also risks misjudging demand and facing insufficient sales at a high price. Penetration pricing is the strategy of setting a low price for a new product. The main purpose of setting a low price is to build market share quickly in order to encourage product trial by the target market and discourage competitors from entering the market. A disadvantage of penetration pricing is that it places a firm in a less-flexible pricing position. It is more difficult to raise prices significantly than it is to lower them. 13. Identify and describe the three types of product-line pricing. Answer: Product-line pricing means establishing and adjusting the prices of multiple products within a product line. Product-line pricing can provide marketers with flexibility in setting prices. When marketers employ product-line pricing, they have several strategies from which to choose. These include captive pricing, premium pricing, and price lining. When marketers use captive pricing, the basic product in a product line is priced low, but the price on the items required to operate or enhance it are higher. This pricing strategy is effective because consumers must purchase more of the operating items than the basic product, over their lifetimes. Premium pricing occurs when the highest-quality product or the most-versatile and most desirable version of a product in a product line is assigned the highest price. Other products in the line are priced to appeal to price-sensitive shoppers or to those who seek product-specific features. Marketers that use premium pricing often realize a significant portion of their profits from premium-priced products. Price lining is the strategy of selling goods only at certain predetermined prices that reflect explicit price breaks. It eliminates minor price differences from the buying decision—both for customers and for managers who buy merchandise to sell in these stores. 14. Identify and describe six types of psychological pricing. Answer: The six types of psychological pricing are odd-number pricing, multiple-unit pricing, reference pricing, bundle pricing, everyday low pricing, and customary pricing. Odd number pricing is the setting of prices using odd numbers that are slightly below whole-dollar amounts. Odd-number prices increase sales because consumers register the dollar amount, not the cents. Multiple-unit pricing involves setting a single price for two or more units of a product, especially for frequently-purchased products. This strategy increases sales by encouraging consumers to purchase multiple units when they might otherwise have only purchased one. Reference pricing means pricing a product at a moderate level and positioning it next to a more expensive model or brand in the hope that a customer will use the higher price as a reference point. Bundle pricing is the packaging together of two or more products, usually of a complementary nature, to be sold for a single price which is usually less than the sum of prices of the individual products. When everyday low pricing is used, a marketer sets a low price for its products on a consistent basis, rather than setting higher prices and frequently discounting them. In customary pricing, certain goods are priced on the basis of tradition. 15. What is bundle pricing? Give three examples, each one from a different industry. Answer: Bundle pricing is the packaging together of two or more products, usually of a complementary nature, to be sold for a single price. To be attractive to customers, the single price usually is considerably less than the sum of the prices of the individual products. Being able to buy the bundled combination in a single transaction may be of value to the customer, increasing convenience and a sense of value. Bundle pricing is used commonly for banking and travel services, computers, and automobiles with option packages. Bundle pricing can help to increase customer satisfaction. It can also help firms to sell slow-moving inventory and increase revenues by bundling it with products with a higher turnover. Examples: i) An airlines company that offers accommodation for cheap when reserving tickets to a particular place ii) A fast-food chain offering soda with a burger for a cheaper price than the price of the two when purchased separately iii) A computer retailer offering accessories for a lower price, when combined with the purchase of a laptop 16. Under what conditions would a marketer most likely use a price leader strategy? Answer: When a firm prices a few products below the usual markup, near cost, or even below cost, it results in what is known as price leaders. This type of pricing is used most often in supermarkets and restaurants to attract customers by offering especially low prices on a few items, with the expectation that they will purchase other items as well. Management expects that sales of regularly-priced products will more than offset the reduced revenues from the price leaders. 17. What are reference prices and how do customers use them? Answer: Reference pricing means pricing a product at a moderate level and positioning it next to a more expensive model or brand in the hope that a customer will use the higher price as a reference point (i.e., a comparison price). Because of the comparison, the customer is expected to view the moderate price more favourably than he or she would if the product were considered in isolation. 18. What are some issues to consider when determining a specific price? Answer: A pricing strategy will yield a certain price or range of prices, which is the final step in the pricing process. However, marketers may need to refine this price in order to make it consistent with circumstances, such as a sluggish economy, and with pricing practices in a particular market or industry. Pricing strategies should help a firm in setting a final price. If they are to do so, marketers must establish pricing objectives, have considerable knowledge about target market customers, and determine demand, price elasticity, costs, and competitive factors. The way marketers use pricing in the marketing mix will also affect the final price. 19. Identify and describe the major types of discounts used for business markets. Then explain the reasons for using each type. Answer: The major types of discounts include: trade, quantity, cash, and seasonal discounts, and allowances. Trade discounts are taken off the list prices and are offered to marketing intermediaries. This is done to attract and keep effective resellers by compensating them for performing certain functions, such as transportation, warehousing, selling, and providing credit. Quantity discounts are given to customers who buy in large quantities because a seller’s per unit selling cost is usually lower for larger purchases. A cash discount is an incentive offered for prompt payment. It encourages customers to buy large quantities when making purchases and, in case of cumulative discounts, encourages customer loyalty. A seasonal discount is a price reduction to buyers who purchase out of season. It helps a seller to maintain steadier production during the year, allows a marketer to use resources more efficiently by stimulating sales during off-peak periods. An allowance is a reduction in price to achieve a desired goal. Trade-in allowances are price reductions granted for turning in used equipment when purchasing new equipment. Promotional allowance ensures that dealers participate in advertising and sales support programs. 20. What are the terms of F.O.B. pricing? Answer: F.O.B. means "free on board". Hence, F.O.B. pricing is a part of geographic pricing, which deals with delivery costs. F.O.B. origin pricing stands for “free on board at the point of origin,” implying that the price does not include freight charges. It requires a buyer to pay the delivery costs, which include transportation from the seller’s warehouse to the buyer’s place of business. F.O.B. destination indicates that a product price does include freight charges, and therefore a seller is responsible for these charges. 21. How can transfer prices be calculated? Answer: When one unit in an organization sells a product to another unit, transfer pricing occurs. A transfer price is determined by calculating the cost of the product, which can vary depending on the types of costs included in the calculations. The choice of the costs to include when calculating the transfer price depends on the company’s management strategy and the nature of the units’ interaction. An organization also must ensure that transfer pricing is fair to all units involved in the purchase. 22. When establishing prices, a marketer's first step is to: A. determine demand. B. develop pricing objectives. C. select a pricing policy. D. evaluate competitors' prices. E. determine a pricing method. Answer: B 23. When marketers emphasize price as an issue and match or beat the prices of other companies, they are engaging in: A. price competition. B. non-price competition. C. comparative pricing strategies. D. demand-based pricing. E. supply-based pricing. Answer: A 24. Safe Auto advertises its automobile insurance as "minimum coverage for minimum budgets." Safe Auto is engaging in: A. non-price competition. B. demand-based pricing. C. competitive pricing. D. price differentiation. E. price competition. Answer: E 25. Sellers that emphasize distinctive product features to encourage brand preferences among customers are practicing: A. product competition. B. non-price competition. C. demand-based pricing. D. price competition. E. supply-based pricing. Answer: B 26. One advantage of non-price competition is that: A. a firm can react quickly to competitive efforts. B. market share becomes less important. C. a firm can build customer loyalty. D. marketing efforts are completely eliminated. E. pricing is no longer a factor. Answer: C 27. Which of the following statements about non-price competition is false? A. Companies that use non-price competition do not need to keep track of their competitor's prices. B. A company must be able to distinguish its brand through some unique feature in order to successfully engage in non-price competition. C. A firm using non-price competition can build loyalty to both its company and its products. D. When using non-price competition, a company should promote the distinguishing characteristics of its brand. E. Companies that use non-price competition can distinguish their products through promotion and packaging. Answer: A 28. A product under non-price competition would most likely not succeed in the market if: A. a new advertising campaign is established for it. B. it is easy to duplicate. C. it is packaged differently from similar products. D. it is priced near the competitors' price. E. its quality has been upgraded. Answer: B 29. Price is a key element in the marketing mix because it relates directly to: A. the size of the sales force. B. the speed of an exchange. C. quality controls. D. the generation of total revenue. E. brand image. Answer: D 30. If Wrigley set its pricing objective as attaining 38 percent of the chewing gum market, what else would be needed to make this a true pricing objective? A. Statement of demand elasticity B. Identification of cost structure C. Breakeven analysis D. Identification of a time period for accomplishment E. Establishment of a subsequent pricing policy Answer: D 31. The Office Place is an office supplies company which has adjusted its price levels so that it can increase its sales volume to match its expenses. The Office Place is most likely employing a ________ objective. A. market share B. cash flow C. return on investment D. survival E. profit Answer: D 32. Running a big sale in order to generate enough cash flow to pay creditors is typical in a situation in which a firm's primary pricing objective is to: A. maintain the status quo. B. increase profit. C. survive. D. increase market share. E. recover. Answer: C 33. Westin Hotels, Inc. has an objective of achieving a 25 percent return from its overall sales. This is an example of a ________ pricing objective. A. market share B. cash flow C. return on investment D. profit E. status quo Answer: D 34. Most pricing objectives based on ________ are achieved by trial and error because not all cost and revenue data are available when prices are set. A. market share B. cash flow C. return on investment D. survival E. profit Answer: C 35. Maintaining or increasing market share: A. can be achieved even if industry sales are flat or decreasing. B. is an infrequently used pricing objective in most industries. C. depends upon the overall growth of the total industry. D. is a profit-related objective based on price. E. is directly tied to leading an industry in product quality. Answer: A 36. Nabisco is considering two pricing objectives. The first is to sell one out of every three crackers consumed in the world, an objective based on _________; the second is to meet, but not beat, competitor’s prices of cookie products, which is an ________ objective. A. cash flow; market share B. market share; cash flow C. survival; status quo D. market share; survival E. market share; status quo. Answer: E 37. A market share objective: A. is not recommended when sales for the total industry are declining. B. is not especially useful when sales for the total industry are increasing. C. is not especially useful when sales for the total industry are flat. D. can be used primarily in an industry where total sales are increasing. E. can be used effectively whether total industry sales are rising or falling. Answer: E 38. Under Armor is establishing a ________ pricing objective to maintain or increase its product's sales in relation to total industry sales. A. return on investment B. survival C. product quality D. market share E. status quo Answer: D 39. Gambrel Designs thinks its new product, the Automatic Dog Walker, will have a short product life cycle. Therefore, its marketing department sets its primary pricing objective as: A. market share. B. cash flow. C. profit. D. product quality. E. status quo. Answer: B 40. Maintaining a certain market share, meeting competitors' prices, maintaining a favourable image, and achieving price stability are all associated with a ________ pricing objective. A. product quality B. market share C. survival D. profit E. status quo Answer: E 41. Which pricing objective de-emphasizes price and can lead to a climate of non-price competition in an industry? A. Status quo B. Return on investment C. Market share D. Survival E. Cash flow Answer: A 42. What type of pricing objective would an organization use if it were in a favourable position and desired nothing more? A. Return on investment B. Cash flow C. Profit D. Status quo E. Survival Answer: D 43. Which type of pricing objective can reduce a firm's risk by helping to stabilize demand for its products? A. Status quo B. Market share C. Survival D. Cash flow E. Return on investment Answer: A 44. The pricing of Clinique makeup, considerably higher than brands such as Cover Girl, Revlon, and Maybelline, is most likely used to communicate ________. A. market share B. product quality C. status quo D. profitability E. cash flow Answer: B 45. Since Victoria’s Secret has decided to use non­price competition, it distinguishes its brand through all of the following except ________. A. distinctive product features. B. exceptional service. C. rebates. D. variety and selection. E. product quality and style. Answer: C 46. The PIMS studies indicates that both market share and ________ are good indicators of profitability. A. low pricing B. product quality C. limited competition D. sales growth E. ROI pricing Answer: B 47. If Wilson Sporting Goods faces a standard demand curve that exists for most products, as it raises the price of its tennis rackets, the: A. quantity demanded goes down. B. demand remains constant. C. quantity demanded increases. D. demand increases. E. break-even increases. Answer: A 48. For most products, a(n) ________ relationship exists between the price of a particular product and the quantity demanded. A. inelastic B. inverse C. positive D. unknown E. elastic Answer: B 49. A graph of the quantity of products marketers expect to sell at various prices if other factors remain constant is a: A. price graph. B. supply curve. C. price/quantity graph. D. marginal revenue curve. E. demand curve. Answer: E 50. When marketers at Consolidated Mustard Company tried to determine demand for their product, they found that at 50 cents, consumers wanted 2,000 jars; at $1.00, they wanted 6,000 jars; and at $1.50, they wanted 4,000 jars. What can Consolidated conclude? A. Consolidated did poor market demand research. B. Consolidated has an elastic product. C. Consolidated has an inelastic product. D. Consolidated mustard is a prestige product. E. Consolidated mustard has a normal demand curve. Answer: D 51. French Quarter Inns reduces the price of a suite from $225 to $195 per night and experiences a reduction in the quantity of rooms demanded by an average of five per night. This is an indication that suites at this hotel are an example of a(n) ________ product. A. reverse-demand B. inferior C. standard D. secondary-demand E. prestige Answer: E 52. What does the demand curve for a prestige product look like? A. It is a straight line where the quantity sold continues to increase as the price of each product increases. B. It is a curve where the highest and the lowest prices yield the greatest quantity sold and mid-range prices produce the fewest sales. C. It forms a curve where the greatest quantity sold comes at a medium price and the quantities fall as the price increases or decreases. D. It forms a straight vertical line because of the prestige of the product, and quantity sold will remain stable regardless of the price. E. It slopes from left to right at a very mild slope, and as quantity increases, price decreases slowly. Answer: C 53. If Seagram's marketers found that the firm's Crown Royal bourbon was a prestige product and raised its price, which of the following would most likely happen? A. The quantity demanded would immediately fall. B. The quantity demanded would always increase. C. Above some price level, the quantity demanded would begin to decrease. D. The demand curve for the product would always shift to the right. E. The demand curve for the product would always shift to the left. Answer: C 54. If Carnival Cruise Lines increased the price of its seven-day cruise package by 10 percent and, as a result, experienced a 20 percent decline in customer bookings, Carnival's demand would be: A. steady. B. inelastic. C. elastic. D. prestige. E. marginal. Answer: C 55. A measure of the sensitivity of demand in relation to changes in price is: A. a demand curve. B. a prestige graph. C. marginal analysis. D. price elasticity of demand. E. quantity elasticity. Answer: D 56. If a product has an inelastic demand and the manufacturer raises its price: A. total revenue will increase. B. quantity demanded will decrease. C. the demand schedule will shift. D. the demand will become more inelastic. E. total revenue will decrease. Answer: A 57. Which of the following statements about price elasticity is false? A. Steak is an example of a product that has an elastic demand for most people, because when price goes up quantity demanded goes down. B. Elasticity of demand is the relative responsiveness of a change in quantity demanded to change in price. C. If marketers can determine price elasticity, then setting prices at optimum levels is much easier. D. When price is raised on a product that has an inelastic demand, then total revenue will decrease. E. Electricity is an example of a product that has elastic demand. Answer: D 58. If Pacific Power and Light increased its rates by 10 percent and the demand for power remained the same, the demand would be: A. elastic. B. minimal. C. minor elasticity. D. variable. E. inelastic. Answer: E 59. Dividing the percentage change in quantity demanded by the percentage change in price gives the: A. prestige demand curve. B. break-even point. C. marginal cost curve. D. price sensitivity curve. E. price elasticity of demand. Answer: E 60. Marginal analysis involves examining: A. what happens to a firm's costs and revenues when production is changed by one unit. B. the sensitivity of consumer demand for a product or product category. C. the quantity of products expected to be sold at different prices. D. the difference between marginal revenue and total revenue. E. the difference between marginal cost and total cost. Answer: A 61. Ethan is an operations unit manager for Morningstar Foods. When developing his monthly budget, he has identified the following costs: Overhead at $120,000; Packaging at $70,000; Advertising at $60,000; Salaries at $400,000; Food production at $90,000, and Distribution at $22,000. The fixed costs in this situation would be: A. overhead, packaging, advertising, salaries, food production, and distribution B. overhead, packaging, advertising, salaries, and distribution C. overhead, advertising, distribution, and salaries D. packaging and distribution E. food production Answer: E 62. The owner of Big Bike Motorcycles is opening a retail outlet at a new location. Which of the following is most likely to be a fixed cost for Big Bike Motorcycles? A. Retail personnel salaries B. Advertising on social networks C. Building rent D. Electricity E. Transportation of sold bikes Answer: C 63. The Palasi Candy Company is a small business located in the United States. The owner of Palasi Candy is calculating the projected costs for the coming year. There is rent for the building, salaries for the retail employees, raw materials of sugar, chocolate, and other ingredients, wrappers for packaging of individual pieces of candy, boxes, and radio advertising. Palasi’s ________ are most likely to be the raw materials of sugar, chocolate, and other ingredients, as well as the wrappers. A. sunk costs. B. variable costs. C. direct costs. D. fixed costs. E. marginal costs. Answer: B 64. If a firm currently produces 2,500 products per month and decides to produce 2,501, it will incur: A. more fixed costs. B. higher average fixed costs. C. fewer variable costs. D. a marginal cost. E. higher average variable costs. Answer: D 65. Roberts Electronics calculates that if it produces 15 radar detectors, its costs are $1,500, and if it produces 16 radar detectors, its costs are $1,590. In this instance, $90 is the firm's ________ cost. A. average B. fixed C. variable D. marginal E. average variable Answer: D 66. If Roberts Electronics finds that the average total cost of its radar detectors and the marginal cost of its radar detectors are both $85, then its: A. marginal costs are falling. B. average total cost is at its maximum. C. average total costs are rising. D. demand is elastic. E. average total cost is at its lowest point. Answer: E 67. Michelin notices that when the number of tires it sells increases from 1,000,000 to 1,000,001, total revenue rises $35. The $35 represents the firm's: A. average revenue. B. marginal revenue. C. price elasticity. D. average variable revenue. E. average total cost. Answer: B 68. At what point does a firm maximize profit? A. The point at which marginal cost equals marginal revenue B. The point at which the firm sells its product at the highest price C. The break-even point plus the adjusted marginal cost D. The point at which marginal profits equal marginal revenue E. The point at which marginal cost equals marginal profits Answer: A 69. When marginal cost is equal to marginal revenue, the firm should: A. produce more to increase profits. B. produce less to decrease total costs. C. stop producing additional units. D. provide discounts to encourage purchases. E. intensify distribution to increase sales. Answer: C 70. If Colgate-Palmolive wants to maximize profit on its toothpaste, it should operate at the point where: A. total costs and total revenues are equal. B. marginal revenue is at its highest level. C. marginal revenue exceeds marginal cost. D. marginal revenue equals marginal cost. E. demand is most elastic. Answer: D 71. At the break-even point: A. the money a company brings in from selling products equals the amount spent producing the products. B. the total fixed costs are exactly equal to the total variable costs. C. profits are exactly equal to the difference between revenue and total variable costs. D. the marginal revenue of a product is exactly equal to the marginal cost of producing one more unit. E. the marginal cost curve and the average cost curve will be identical for a particular product. Answer: A 72. Jared is developing a business plan for a new type of bicycle helmet. He is interested in finding the point at which the costs of producing the helmet will equal the revenue earned from selling the product. Jared is interested in finding the: A. elasticity of demand. B. break-even point. C. variable costs. D. price elasticity. E. the sum of fixed costs. Answer: B 73. Managers at Caterpillar have determined the costs associated with producing hay balers are equal to the price that they charge for the hay balers. This indicates that Caterpillar is producing at the ________ point. A. break-even B. marginal cost C. profit margin D. competitive price E. profit maximizing Answer: A 74. To determine the break-even point in units, divide the fixed costs by: A. total costs. B. variable costs multiplied by price. C. price minus variable costs. D. price per unit. E. total revenue minus fixed costs. Answer: C 75. If the product price is $100, average variable cost $40 per unit, and the total fixed costs are $120,000, what is the break-even point? A. 500 units B. 2,000 units C. 1,200 units D. 300 units E. 3,000 units Answer: B 76. Markum Industries determines that, for its air compressors, the following results are achieved at a price of $250: total costs = $250; variable costs per unit = $100; fixed costs = $175,000. Given these figures, Markum would break even at ________ units. A. 1,167 B. 1,000 C. 1,750 D. 2,500 E. 700 Answer: A 77. A certain location of O'Charley's Restaurant has annual fixed costs of $200,000. If an average tab at the restaurant is $60 and the variable costs per tab is $20, how many groups of customers must O'Charley's serve per year in order to break even? A. 2,000 B. 5,000 C. 10,000 D. 3,333 E. 2,500 Answer: B 78. The Highland Racquet Club found that with annual fixed costs of $60,000, its break-even point is 2,000 members when the membership charge is $60 per person per year. What is the variable cost per person for Highland? A. $45 B. $50 C. $30 D. $25 E. $40 Answer: C 79. Abby is a marketing consultant who specializes in small businesses. Her current client is very interested in estimating the costs for the coming year, in order to find the break-even point. Abby knows this is an important financial statistic because below the break-even point, the firm operates: A. with fixed costs only. B. with minimal variable costs. C. with no revenue. D. with minimal profit. E. at a loss. Answer: E 80. What assumption does break-even analysis make that limits its overall usefulness? A. It focuses on how to achieve a price objective. B. It assumes a company wants to gain a certain market share. C. It relies on demand for a product being inelastic. D. It focuses only on competitive factors and not costs. E. It assumes that demand is elastic for the product. Answer: C 81. Marketers at organizations engaged in price competition: A. are more concerned about knowing competitors' prices than marketers in organizations that are engaged in price competition. B. are not concerned about the prices of competing brands. C. need competitive price information to make sure that their products are priced at approximately the same level as the prices of competing brands. D. do not employ comparative shoppers to help them gather information regarding the prices of competing brands. E. experience high levels of price instability. Answer: C 82. Marketers improve their ability to establish prices appropriately when: A. there is non-price competition. B. they know the prices charged for competing brands. C. their products are of better quality than the competition's. D. the main objective is image building. E. using psychological pricing. Answer: B 83. The three primary bases for developing prices are: A. profit, demand, and competition. B. supply, demand, and marketing objectives. C. demand, competition, and cost. D. markup, cost, and cost-plus. E. negotiation, periodicity, and randomness. Answer: C 84. Marketers generally view ________ as the minimum price a product can be sold for. A. revenue B. demand C. profits D. costs E. moderate losses Answer: D 85. When a seller's costs are usually determined during or after a product is made, and then a specified percentage or dollar amount is added to the cost to establish a price, an organization is using ________ pricing. A. markup B. demand-based C. differential D. cost-plus E. expense-based Answer: D 86. For custom-made equipment or commercial construction projects, which pricing method is most likely used? A. Prestige B. Premium C. Differential D. Return-on-investment E. Cost-plus Answer: E 87. Steinway produces concert grand pianos, often using the custom materials and designs desired by a specific customer. The average price of these pianos runs about $50,000 depending on the exact piano. What type of pricing does Steinway most likely use for these pianos? A. Markup B. Competition-based C. Cost-plus D. Demand-based E. Secondary-market Answer: C 88. Which of the following statements about markup pricing is correct? A. The use of similar markups reduces price competition. B. Markup pricing is inconvenient to use. C. Markup pricing results in a high price when demand is high and a low price when demand is low. D. Markup pricing is a demand-based pricing method. E. Using markups makes pricing a time-consuming, difficult process. Answer: A 89. Markup is measured either as a percentage of ________ or a percentage of ________. A. selling price; cost B. cost; profit C. revenue; contribution margin D. resources used; cost E. demand; competition Answer: A 90. When determining markup as a percentage of cost, divide the markup amount by: A. price. B. cost. C. quantity. D. revenue. E. 100. Answer: B 91. A retailer of Real Dry deodorant prices it at $2.00, while it costs the retailer $1.40. What is the approximate markup as a percentage of selling price? A. 3 percent B. 14.3 percent C. 30 percent D. 70 percent E. 20 percent Answer: D 92. Kohl’s pays $16.50 for a six­ounce bottle of cologne and sells it for $25.95. Its markup as a percentage of cost is approximately ________ percent for this product. A. 64 B. 36 C. 18 D. 57 E. 45 Answer: A 93. If a product is priced based on how many or how few people want it at a particular time and place, ________ pricing is being used. A. markup B. demand-based C. competitive D. peak E. differential Answer: B 94. Amtrak is considering two pricing strategies for its service. One is to price its train tickets so that it is less expensive to travel on weekends than during the week when there is business travel, which illustrates ________ pricing. The second is to price its train tickets so that the further away the travel date, the greater the discount, which is best described as ________. A. demand-based; secondary market pricing B. demand-based; differential pricing C. demand-based; periodic discounting D. cost-plus; secondary markup E. cost-plus; periodic discounting Answer: B 95. During July and August, Lakewood Links Golf Course, located in South Carolina, offers weekday rates of $13 for a round of golf with a cart. During the rest of the year, the weekday rates are between $25 and $35. This is an example of the use of: A. differential pricing. B. incentives. C. competition-based pricing. D. demand-based pricing. E. random discounting. Answer: D 96. If General Motors determines that it wants to sell 200,000 Chevrolet Acadias and sets the price at $29,500. The firm knows that at that price it will achieve its goal. Therefore, the firm would be using a ________ pricing method. A. cost-plus B. competition-based C. psychological D. comparison E. demand-based Answer: E 97. Competition-based pricing is: A. used when costs and revenues are secondary to competitors' prices. B. not a useful method to increase market share. C. not useful if the competing products are homogeneous. D. used to price above competitors’ prices. E. used when competing products are heterogeneous. Answer: A 98. When products in an industry are relatively homogeneous and price is a key purchase consideration: A. competition-based pricing becomes more important. B. demand-based pricing dominates pricing decisions. C. firms tend to use secondary-market pricing. D. cost-based methods like markup pricing are dominant. E. customary pricing is used. Answer: A 99. If local Shell gasoline stations look at BP stations’ prices as the primary method of determining its own prices, Shell is most likely using: A. price fixing; which considers competition to be less important than costs. B. price fixing; which considers costs to be less important than competitor’s prices. C. market share pricing; which considers competition to be the ultimate pricing goal. D. competition-based pricing, which considers profit to be the ultimate pricing goal. E. competition­based pricing, which considers costs to be less important than competitor’s prices. Answer: E 100. If PepsiCo sets its twelve-pack price to match the price charged by Coca-Cola, Pepsi is using ________ pricing methods? A. demand-based B. cost-based C. reference D. competition-based E. psychological Answer: D 101. The fact that senior citizens are charged a lower price at movie theaters than younger adults is an example of ________ pricing. A. price-line B. promotional C. professional D. differential E. psychological Answer: D 102. Executives in Japan decided to price Lexus luxury cars in the United States at $55,000 while pricing them at $66,000 in their own country. This is an example of: A. secondary-market pricing. B. price skimming. C. bait pricing. D. prestige pricing. E. random discounting. Answer: A 103. Lucy buys a new dress at T.J. Maxx that has a price tag with "Compare at $150.00, our Price $89.99." This is an example of the use of: A. bundle pricing. B. cumulative discounts. C. seasonal discounts. D. base-point pricing. E. reference pricing. Answer: E 104. To gain market share, when Hyundai first entered the U.S. car market it did so with a comparatively low pricing strategy. One of the negative side effects of making this pricing decision is: A. absence of product trial by the target market. B. difficulty raising the prices later. C. a high return on investment level affecting tax balances owed. D. poor survival chances. E. higher developmental costs. Answer: B 105. If a company provides price differentials that harm competition by giving one or more buyers a competitive advantage, it is committing: A. periodic discounting. B. price-consciousness. C. functional discounting. D. price competition. E. price fixing. Answer: A 106. A problem associated with ________ is that consumers can predict when prices will be lowered and delay purchases until that time. A. random discounting B. penetration pricing C. reference pricing D. everyday low pricing E. periodic discounting Answer: E 107. A manager at Kohl's discovers that Macy’s has reduced the price of its children's Levi's from $31.99 to $24.99, according to an advertisement in the Sunday newspaper. She immediately phones her store and instructs the salesperson on duty to put a sign up next to their children's Levi's that reads, "SALE: $24.99." This is an example of: A. secondary-market pricing. B. bait-pricing. C. reference pricing. D. random discounting. E. comparison discounting. Answer: D 108. If a business decides to reduce its prices once in a while on an unsystematic basis, it is using: A. price reduction planning. B. random discounting. C. bait pricing. D. periodic discounting. E. penetration pricing. Answer: B 109. If Norelco introduced a new electric razor that sonically removes hair and priced it first at $175 and then at $150 before reducing the price to $100, the firm's initial pricing strategy is known as: A. penetration pricing. B. psychological pricing. C. price lining. D. price skimming. E. odd-even pricing. Answer: D 110. Sony management decided to use skimming as a pricing strategy for its newest line of high-definition television (HDTV) sets. It should be aware that this strategy does not: A. generate capital to cover research and development costs. B. discourage competitors from entering the market. C. provide flexibility in the introductory base price. D. protect the firm from covering costs if prices are set too low. E. reduce the stress that may be placed on the firm's production capabilities. Answer: B 111. A price-skimming strategy assumes that: A. the firm cannot recover the high costs of R&D. B. the product is efficient. C. it will be difficult to recoup development costs. D. all consumers have homogeneous tastes. E. the initial demand is highly inelastic. Answer: E 112. A penetration pricing strategy is particularly appropriate when demand is: A. increasing. B. highly elastic. C. highly inelastic. D. decreasing. E. inefficient. Answer: B 113. If Nabisco wants to quickly gain a large market share with its new line of reduced-fat snack crackers, it should use: A. penetration pricing. B. random discounting. C. captive pricing. D. price skimming. E. everyday low prices. Answer: A 114. The management at Allied Electronics is having difficulty in raising the introductory price on system components to cover the increased costs of producing the sensing devices for home security systems. Apparently, Allied used a(n) ________ strategy in pricing these components. A. odd-even B. skimming C. lining D. penetration E. psychological Answer: D 115. Pricing the basic product in a product line low, while pricing related items at a higher level is called: A. premium pricing. B. bait pricing. C. captive pricing. D. price skimming. E. price lining. Answer: C 116. A product that has more features than those of its competition, or that is perceived to be of higher quality, warrants using: A. custom pricing. B. special-event pricing. C. premium pricing D. price lining. E. bait pricing. Answer: C 117. Breyer's produces a variety of ice cream flavors and of varying qualities. The higher quality ice cream varieties are priced higher than the basic ones. Breyer's is using ________ to price its ice cream. A. captive pricing B. price baiting C. premium pricing D. bait pricing E. differential pricing Answer: C 118. When a company that produces computer printers prices them low, but the ink required to operate the printer is priced higher per relative usage, it is using: A. bait pricing. B. premium pricing C. penetration pricing. D. price lining. E. captive pricing. Answer: E 119. When an organization sets a number of prices for selected groups of merchandise, this is commonly referred to as: A. prestige pricing. B. price lining. C. customary pricing. D. odd-even pricing. E. ethical pricing. Answer: B 120. The pricing strategy that assumes that demand is relatively inelastic over certain price ranges is called: A. price lining. B. odd-even pricing. C. price skimming. D. prestige pricing. E. customary pricing. Answer: A 121. When a satellite dish company uses bundling to combine phone, dish, and broadband Internet access prices, it is attempting to influence a consumer's perception of price to make a product's price more attractive and reduce "sticker shock." This is an example of using a ________ pricing strategy. A. competition-based B. cost-based C. promotional D. competitive E. psychological Answer: E 122. All of the following are psychological techniques except: A. customary pricing. B. multiple-unit pricing. C. reference pricing. D. odd-number pricing. E. negotiated pricing. Answer: E 123. Reference pricing is: A. listing the manufacturer's suggested retail price on the price tag along with the store's lower price. B. mentioning the price that other retailers charge for the same product on the display for the product. C. using a consumer's internal perceptions of what the appropriate price should be to help price a firm's products. D. pricing a product at a moderate level and positioning it next to a more expensive model or brand. E. using prices in advertising so that customers will have a point of reference when they come to the retail facility. Answer: D 124. A Macy's manager designs the casual clothing department such that one of Macy's private label pairs of jeans, priced at $24.99, is positioned next to a national brand of jeans, such as Levi’s, priced at $39.99. Which of the following strategies is the manager attempting to accomplish? A. Everyday low prices strategy B. Odd-even pricing strategy C. Prestige pricing strategy D. Special-event pricing strategy E. Reference pricing strategy Answer: E 125. Bundle pricing is perceived to be of value by customers because: A. they reduce or eliminate the use of frequent short-term price reductions. B. they prefer buying a combination of products in a single transaction, which saves time, effort, and money. C. the companies selling the products can sell them at a lower price because their costs of packaging are lower. D. the prices are coordinated with advertising or sales promotions. E. they can purchase items that are consumed frequently in larger quantities. Answer: B 126. When Mia and Shane are planning their honeymoon, their travel agent tells them that if they buy a special package, their trip to Paris will include meals, tickets to the theater, and a rental car in addition to airfare and a hotel. This is an example of the use of: A. multiple-unit pricing. B. bundle pricing. C. prestige pricing. D. price lining. E. price packaging. Answer: B 127. Price leaders, comparison discounting, and special-event pricing are examples of: A. psychological pricing. B. professional pricing. C. product-line pricing. D. premium pricing E. promotional pricing. Answer: E 128. If Kroger Food Stores advertises 2-liter bottles of Pepsi for 89 cents to generate store traffic that will purchase other items at regular prices, the grocer is using: A. reference pricing. B. a price leader. C. special-event pricing. D. comparison discounting. E. professional pricing. Answer: B 129. A product is a price leader when: A. it is sold at the highest price. B. its price maximizes profits. C. an increase or decrease in price leads to increased revenue or lower costs. D. it is sold at a lower cost in the hope that sales of other products will increase. E. its price leads the industry in sales. Answer: D 130. To attract customers into a store, Safeway advertises its milk at a lower cost, hoping that customers will purchase other groceries as well. This pricing strategy is called: A. price lining. B. special-event pricing. C. differential pricing. D. comparison discounting. E. price leader pricing. Answer: E 131. Which of the following pricing strategies most likely results in a retailer losing money on the product? A. Price leader pricing B. Psychological pricing C. Penetration pricing D. Special-event pricing E. Ethical pricing Answer: A 132. Chris is planning three sales during the third quarter of the year at Toys R’ Us. The first is at the beginning of the school year, the second is the week before Halloween, and the third is Black Friday. These sales would be considered to be: A. psychological pricing. B. calendar discounting. C. sales promotion pricing. D. special-event pricing. E. captive pricing. Answer: D 133. Showing a product's price along with its previous price, the price of a competing brand, or the price at another retail outlet is called: A. competition-based pricing. B. reference pricing. C. comparison discounting. D. captive pricing. E. psychological pricing. Answer: C 134. The manager at Target puts a sign up next to a Samsung audio system that reads, "Only $299.99! $60 less than at Best Buy." This is an example of: A. random discounting. B. periodic discounting C. comparison discounting. D. penetration pricing. E. everyday low prices. Answer: C 135. What type of discount is given to marketing intermediaries or middlemen? A. Quantity B. Cash C. Geographic D. Service E. Trade Answer: E 136. The Panama Jack Company utilizes a special strategy to sell its ECO-shirt line. Its basic promotional tool is discount. These discounts offered to middlemen for performing certain channel activities are referred to as ________ discounts. A. trade B. cumulative C. noncumulative D. quantity E. intermediary Answer: A 137. Laura Spangler, of North Central Novelties, reduces the price of games sold to Robertson's Entertainment by 10 percent to allow for expenses associated with Robertson's promoting the games to consumers. This is an example of a ________ discount. A. quantity B. cash C. seasonal D. trade E. complementary Answer: D 138. If Ralph Lauren offers to reduce the price of its women's blazers when retailers buy more than 100 pieces, the designer is offering a ________ discount. A. quantity B. cash C. seasonal D. trade E. complementary Answer: A 139. A concession in price in business markets to achieve a desired goal is called a(n): A. allowance. B. objective-oriented discount. C. cash discount. D. trade discount. E. cumulative discount. Answer: A 140. Reductions for transportation and other costs related to the physical distance between buyer and seller are known as: A. base-point pricing. B. freight absorption pricing. C. penetration pricing. D. location pricing. E. geographic pricing. Answer: E 141. If a retailer orders a quantity of merchandise to be delivered to his store in Phoenix and is quoted a price that does not include shipping charges, the retailer is paying a(n) ________ price. A. F.O.B. destination B. F.O.B. origin pricing C. transfer D. postage-stamp E. base-point Answer: B 142. Ryan orders 16 dozen fishing lures from Strike Right for $375. When he gets the invoice, he is furious that $25 in freight charges has been tacked on to his bill because he thought the price included freight costs. Ryan should have been certain that the order terms were: A. F.O.B. origin. B. F.O.B. factory. C. cumulative D. noncumulative E. F.O.B. destination. Answer: E 143. The frozen foods division of Swanson purchases food trays and boxes from the packaging division. The form of pricing used to charge the frozen foods division is called: A. zone pricing. B. base-point pricing. C. business-unit pricing. D. transfer pricing. E. price discrimination. Answer: D 144. When Cadillac buys headlights from Delco, both of which are divisions of General Motors, ________ pricing occurs. A. base-point B. zone C. transfer D. geographic E. matrix Answer: C Scenario 12.1 Use the following to answer the questions. Concession Supply sells hotdogs, buns, and nacho ingredients to several major league ballparks across the country. Currently, Concession Supply has the following pricing information for one case of hotdogs sold at Wrigley Field: Total fixed costs = $1,200, Selling price = $16, and Variable costs = $6. 145. Refer to Scenario 12.1. If Concession Supply increased its price by 10 percent and experienced only a 2 percent decrease in the demand for hotdogs, the demand would be: A. inelastic. B. constant C. prestige. D. elastic. E. marginal. Answer: A 146. Refer to Scenario 12.1. To break even, Concession Supply should sell ________ cases of hot dogs per day at Wrigley Field. A. 13 B. 120 C. 40 D. 200 E. 60 Answer: B 147. Refer to Scenario 12.1. What is the break-even point in dollar sales volume? A. $1,200 B. $1,440 C. $3,000 D. $1,920 E. $1,600 Answer: D Scenario 12.2 Use the following to answer the questions. Ray-Ban is considering a new line of sunglasses that would be sold in major department stores. The new line would be positioned as a more distinctive brand than the typical glasses sold through department stores, and would be priced higher than other brands in the store. A lower price line than the current Ray-Ban lines that are sold through more selective stores. In determining the price for this sunglass line, Ray-Ban wants to gather information about all brands sold in department stores and about customers' perceptions of those brands. 148. Refer to Scenario 12.2. Ray-Ban's plan of gathering information about the other brands sold in department stores, including their prices, would most likely be used in a ________ basis for pricing. A. cost B. competition C. demand D. customer E. market Answer: B 149. Refer to Scenario 12.2. Ray-Ban has decided to promote the new sunglasses line as an "affordable luxury" and plans significant promotional expenditures. With these objectives, which of the following should Ray-Ban use to price its product line? A. competition-based pricing B. cost-plus pricing C. markup pricing D. demand-based pricing E. differential pricing Answer: D 150. Refer to Scenario 12.2. Given Ray-Ban's plan for positioning the new sunglasses line, they should use a ________ strategy when introducing their new product. A. promotional B. penetration C. price-skimming D. reference E. secondary-market Answer: C Scenario 12.3 Use the following to answer the questions. Glenwood Pet Hospital is considering implementing a new pricing strategy for its veterinarian services. After reviewing the previous three years' revenue, Glenwood finds that most of its customers bring their pets in for the required annual vaccinations only if the animal is ill. Glenwood's objective is to generate more income per customer on an annual basis. The hospital has previously priced its services by charging a flat fee for the office visit, a fee for each vaccine, and a fee for each type of examination beyond the basic office visit. Most customers pay the flat office fee and a fee for a rabies vaccine. Glenwood is now considering a new plan where the pet owner would pay one fee that would cover an office visit, the required rabies vaccine, and additional vaccines that prevent heartworm, kennel-cough, and fleas. Glenwood hopes to encourage the pet owners to view their pet's health as part of a prevention program, rather than a one-time annual visit. 151. Refer to Scenario 12.3. Glenwood's new pricing strategy is an example of ________ pricing. A. cost-based B. psychological C. customary D. bundle E. demand-based Answer: D 152. Refer to Scenario 12.3. Glenwood has decided that it is going to offer a special package if the prevention plan is purchased within the first 30 days of each year's time for vaccinations. This type of pricing strategy would be an example of: A. customary pricing. B. secondary-market pricing. C. introductory pricing. D. periodic discounting. E. random discounting. Answer: D 153. Refer to Scenario 12.3. Glenwood's closest competitor, The Hearthstone Pet Hospital, currently charges $60 for each basic office visit. If Glenwood were to price its basic office visit at $45, it would most likely be employing: A. customary pricing. B. penetration pricing. C. prestige pricing. D. price skimming. E. cost-based pricing. Answer: B Scenario 12.4 Use the following to answer the questions. The BASF Chemical Company in Germany has developed a new rubberized coating. The product is used on cell phones and other hand-held electronic devices that give them protection from falls and scratches. BASF plans to market the product directly to businesses that manufacture the casings for these types of products. BASF currently uses a system of salespeople headquartered in Germany, while its primary business customers are in China. 154. Refer to Scenario 12.4. BASF has decided to offer discounts to its businesses customers in the form of the following: For each order of $100,000 or more during the next 90 days, the buyer will receive a rebate of 5 percent. This type of pricing would be an example of ________ discounts. A. allowance B. cash C. seasonal D. noncumulative E. cumulative Answer: E 155. Refer to Scenario 12.4. BASF is considering the problem of actual distance in delivering its product from the plant in Germany to some of its customers in China. Which pricing strategy would help overcome this problem? A. Geographic B. Transfer C. Commercial D. Transit E. Factory Answer: A 156. Refer to Scenario 12.4. If BASF were to employ pricing that includes the price at the factory plus freight charges from a chosen point nearest the buyer, this would be an example of ________ pricing. A. factory plus B. dispersion C. F.O.B. destination D. freight absorption E. F.O.B. origin Answer: C 157. Refer to Scenario 12.4. If BASF were to price its products in barrels from the factory, before it is loaded on the carrier, this would be an example of ________ pricing. A. buy-back allowance B. geographic C. F.O.B destination D. F.O.B. origin E. base-point Answer: D 158. The eight stages of setting prices should always be followed if prices are to be set correctly. A. True B. False Answer: False 159. The objective of profit maximization is rarely operational because its achievement is difficult to measure. A. True B. False Answer: True 160. The objective of maintaining or increasing market share depends on growth in industry sales. A. True B. False Answer: False 161. Price is a flexible ingredient in the marketing mix. A. True B. False Answer: True 162. The major disadvantage of using price competition is that it takes a long time to implement the changes in price. A. True B. False Answer: False 163. A seller can change prices quickly in a price competition situation. A. True B. False Answer: True 164. A firm that competes on a price basis is unable to change prices frequently. A. True B. False Answer: False 165. Price competition is a very flexible marketing strategy. A. True B. False Answer: True 166. Non-price competition emphasizes distinctive product features, service, and product quality. A. True B. False Answer: True 167. Non-price competition allows a company to increase its brand's unit sales through means other than changing the brand's price. A. True B. False Answer: True 168. Non-price competition can be used to establish brand loyalty. A. True B. False Answer: True 169. Brand uniqueness is not important in non-price competition. A. True B. False Answer: False 170. A firm can survive in the long run only if its products are sold below cost. A. True B. False Answer: False 171. Marketers should set prices consistent with the firm's marketing and overall objectives. A. True B. False Answer: True 172. The importance of price depends on the type of product, the type of target market, and the purchase situation. A. True B. False Answer: True 173. Knowing the target market's evaluation of price allows the marketer to know how much emphasis to place on price and how to price a product relative to competition. A. True B. False Answer: True 174. A customer's interpretation and response to a price depends on what the customer receives from a purchase compared to what he or she gives up to make a purchase. A. True B. False Answer: True 175. The role played by the attitude toward price in the overall evaluation of the marketing mix is a minor concern in identifying the target market. A. True B. False Answer: False 176. Demand depends only on the price of the product. A. True B. False Answer: False 177. With prestige products, a firm will always be able to sell more at a lower price. A. True B. False Answer: False 178. Prestige products tend to sell better at a high price than at a low price. A. True B. False Answer: True 179. Changes in buyers' attitudes, other components of the marketing mix, and uncontrollable environmental factors can influence demand. A. True B. False Answer: True 180. Price elasticity of demand measures the sensitivity of demand to changes in price. A. True B. False Answer: True 181. Electricity is an example of a product that is price elastic. A. True B. False Answer: False 182. Pricing decisions can be based on determining whether the demand for a product is price elastic or price inelastic. A. True B. False Answer: True 183. If demand is elastic, a change in price causes a parallel change in total revenue. A. True B. False Answer: False 184. Elastic demand is usually a result of the lack of substitute products. A. True B. False Answer: False 185. Product demand usually becomes more elastic over time because more substitutes are found. A. True B. False Answer: True 186. Factors affecting pricing decisions can include demand, distribution, and the way in which the product is promoted. A. True B. False Answer: True 187. Profits for a firm are computed as follows: Profits = TR − FC. A. True B. False Answer: False 188. Fixed costs vary with the number of units produced or sold. A. True B. False Answer: False 189. Rent is usually a fixed cost. A. True B. False Answer: True 190. Marginal revenue is the change in total revenue that occurs when a firm sells an additional unit of the product. A. True B. False Answer: True 191. Profit is the highest at the point where marginal revenue and marginal cost are equal. A. True B. False Answer: True 192. The point at which marginal revenue equals marginal cost is the break-even point. A. True B. False Answer: False 193. Knowing the number of units necessary to break even is important in setting the price. A. True B. False Answer: True 194. Marketers are usually in a better position to establish prices when they know the prices charged for competing brands. A. True B. False Answer: True 195. It is easy to obtain an accurate price list for a competitor's products. A. True B. False Answer: False 196. Some stores employ comparative shoppers to learn what prices their competitors are charging. A. True B. False Answer: True 197. Costs are a major issue when establishing price. A. True B. False Answer: True 198. Cost-based pricing strategies result in a percentage being added to the cost of the product. A. True B. False Answer: True 199. Cost-based pricing does not necessarily take into account the economic aspects of supply and demand. A. True B. False Answer: True 200. Cost-plus pricing is popular in periods of rapid inflation. A. True B. False Answer: True 201. Markup can be stated as a percentage of the cost or as a percentage of the selling price. A. True B. False Answer: True 202. A major reason why retailers use markup pricing is that it is convenient. A. True B. False Answer: True 203. The effectiveness of demand-based pricing often depends on a marketer's ability to determine all the costs associated with the product. A. True B. False Answer: False 204. A firm that considers costs and revenue secondary to competitors' prices when setting its own prices is using a competition-based pricing strategy. A. True B. False Answer: True 205. The government frequently uses competition-based pricing in granting defense contracts. A. True B. False Answer: False 206. Competition-based pricing is important if competing products are almost homogeneous or if price is the key variable in the marketing strategy. A. True B. False Answer: True 207. Ideally, a pricing strategy has little relation to a firm's marketing objectives. A. True B. False Answer: False 208. A pricing strategy is a course of action designed to achieve pricing and marketing objectives. A. True B. False Answer: True 209. Differential pricing means different buyers pay different prices for the same quality and quantity of product. A. True B. False Answer: True 210. Differential pricing is effective mainly when focusing on only one market segment. A. True B. False Answer: False 211. An early-bird special offered by a restaurant during off-peak hours is an example of the secondary-market pricing strategy. A. True B. False Answer: True 212. Periodic discounting is often predictable, and therefore consumers wait to make purchases so that they can benefit from the price reductions. A. True B. False Answer: True 213. Random discounting means discounting various products on a systematic basis. A. True B. False Answer: False 214. Penetration pricing and price skimming of the market are two types of new-product pricing strategies. A. True B. False Answer: True 215. Price skimming is designed to yield maximum unit sales volume. A. True B. False Answer: False 216. The use of price skimming discourages competitors from entering a market. A. True B. False Answer: False 217. Penetration pricing is a new-product pricing approach that provides the most flexible introductory price. A. True B. False Answer: False 218. A company wanting to maximize profits from its new product would use product-line pricing. A. True B. False Answer: False 219. Captive pricing, premium pricing, and price lining are all strategies aimed at maximizing the profits of an entire product line rather than an individual product. A. True B. False Answer: True 220. Grocery stores that position their less expensive, private brands next to more expensive, well-known manufacturer brands on the shelf are using the concept of reference pricing. A. True B. False Answer: True 221. A psychological price is designed to encourage purchases on the basis of rational response rather than on the basis of emotional reactions. A. True B. False Answer: False 222. In some cases, prices are assigned to goods on the basis of tradition. A. True B. False Answer: True 223. A price-leader approach is a pricing approach most often used in supermarkets to attract consumers by giving them special low prices on a few items. A. True B. False Answer: True 224. The local florist advertises a discount on arrangements during the month of April because the anniversary of the store's opening is in April. This is an example of special-event pricing. A. True B. False Answer: True 225. The way that pricing is used in the marketing mix will influence the determination of the final price. A. True B. False Answer: True 226. Setting prices for business products is very similar to setting prices for consumer products. A. True B. False Answer: False 227. Producers commonly provide discounts off list prices to intermediaries. A. True B. False Answer: True 228. Seasonal discounts provide price incentives to customers during peak-selling seasons. A. True B. False Answer: False 229. If the price is quoted as F.O.B. origin pricing, then shipping costs are paid by the seller. A. True B. False Answer: False 230. Transfer pricing involves the sale of a product to another unit within the same organization. A. True B. False Answer: True Test Bank for Foundations of Marketing William M. Pride, O. C. Ferrell 9781285429779, 9781439039441

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