Chapter 10

Principles of Marketing, 15e (Kotler/Armstrong) Chapter 10 Pricing: Understanding and Capturing Customer Value 1) ________ refers to the amount of money charged for a product or service. A) Value B) Cost C) Price D) Wage E) Salary Answer: C Page Ref: 290 Skill: Concept Objective: 10-1 Difficulty: Easy 2) ________ is the only element in the marketing mix that produces revenue. A) Price B) Product C) Place D) Fixed costs E) Variable costs Answer: A Page Ref: 290 Skill: Concept Objective: 10-1 Difficulty: Easy 3) Which of the following is true with regard to price? A) Historically, price has had the least perceptible impact on buyer choice. B) Price is the least flexible element in the marketing mix. C) Unike product features and channel commitments, prices cannot be changed quickly. D) Price is the sum of all the values that customers give up to gain the benefits of having a product. E) Prices only have an indirect impact on a firm's bottom line. Answer: D Page Ref: 290 Skill: Concept Objective: 10-1 Difficulty: Moderate

1 Copyright © 2014 Pearson Education, Inc.

4) What sets the ceiling for product prices? A) product manufacturing costs B) sellers' perceptions of the product's value C) customer perceptions of the product's value D) variable costs E) break-even volume Answer: C Page Ref: 291 Skill: Concept Objective: 10-2 Difficulty: Easy 5) What sets the floor for product prices? A) consumer perceptions of the product's value B) product costs C) competitors' strategies D) advertising budgets E) market competition Answer: B Page Ref: 291 Skill: Concept Objective: 10-2 Difficulty: Easy 6) Effective ________ pricing involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value. A) customer-oriented B) cost-based C) time-based D) competition-oriented E) marketer-oriented Answer: A Page Ref: 291 Skill: Concept Objective: 10-2 Difficulty: Easy 7) ________ pricing uses buyers' perceptions of value as the key to pricing. A) Customer value-based B) Cost-based C) Time-based D) Markup E) Target return Answer: A Page Ref: 291 Skill: Concept Objective: 10-2 Difficulty: Easy 2 Copyright © 2014 Pearson Education, Inc.

8) Which of the following is true of value-based pricing? A) The targeted value and price drive decisions about what costs can be incurred and the resulting product design. B) Value-based pricing is mostly product driven. C) Value-based pricing involves setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for its effort and risk. D) The marketer usually designs a product and marketing program and then sets the price. E) A company using value-based pricing designs what it considers to be a good product, adds up the costs of making the product, and sets a price that covers costs plus a target profit. Answer: A Page Ref: 291 AACSB: Analytic Skills Skill: Concept Objective: 10-2 Difficulty: Moderate 9) Which of the following processes does value-based pricing reverse? A) high-low pricing B) everyday low pricing C) cost-based pricing D) good-value pricing E) value-added pricing Answer: C Page Ref: 291 Skill: Concept Objective: 10-2 Difficulty: Easy 10) A pharmaceutical company in Utah recently released a new and expensive anti-ulcer drug in the market. The company justifies the high price of the drug by claiming that it is highly effective for treating all kinds of ulcers. The company also claims that the new drug will help bring down the need for invasive surgeries, an additional benefit for patients. Which of the following pricing strategies is the pharmaceutical company most likely using in this instance? A) target pricing B) markup pricing C) cost-based pricing D) value-based pricing E) break-even pricing Answer: D Page Ref: 291 AACSB: Analytic Skills Skill: Application Objective: 10-2 Difficulty: Moderate

3 Copyright © 2014 Pearson Education, Inc.

11) The perceived value of different product offers can be reasonably assessed by ________. A) conducting a SWOT analysis B) conducting a break-even analysis C) conducting surveys and experiments D) collecting data about competitors' offers E) setting a benchmark for product quality Answer: C Page Ref: 292 Skill: Concept Objective: 10-2 Difficulty: Easy 12) Underpriced products ________. A) produce less revenue than they would if they were priced at the level of perceived value B) sell poorly in the global marketplace C) produce more revenue than they would if they were priced at the level of perceived value D) mostly offer higher value than those with a high markup price E) are characterized by rapidly declining demand Answer: A Page Ref: 292 Skill: Concept Objective: 10-2 Difficulty: Easy 13) Which of the following involves introducing less-expensive versions of established, brandname products? A) markup pricing B) good-value pricing C) time-based pricing D) cost-based pricing E) target profit pricing Answer: B Page Ref: 292 Skill: Concept Objective: 10-2 Difficulty: Easy

4 Copyright © 2014 Pearson Education, Inc.

14) ________ pricing refers to offering just the right combination of quality and gratifying service at a fair price. A) Markup B) Good-value C) Cost-plus D) Target profit E) Break-even Answer: B Page Ref: 293 Skill: Concept Objective: 10-2 Difficulty: Easy 15) When McDonald's and other fast food restaurants offer "value menu" items at surprisingly low prices, they are most likely using ________. A) break-even pricing B) target profit pricing C) good-value pricing D) cost-plus pricing E) target return pricing Answer: C Page Ref: 292 Skill: Concept Objective: 10-2 Difficulty: Easy 16) Azure Air, an airline company, offers attractive prices to customers with tighter budgets. A no-frills airline, it charges for all other additional services, such as baggage handling and inflight refreshments. Which of the following best describes Azure Air's pricing method? A) target profit pricing B) good-value pricing C) cost-based pricing D) break-even pricing E) penetration pricing Answer: B Page Ref: 293 Skill: Application Objective: 10-2 Difficulty: Moderate

5 Copyright © 2014 Pearson Education, Inc.

17) Retailers such as Costco and Walmart charge a constant, daily low price with few or no temporary price discounts. This is an example of ________. A) competition-based pricing B) everyday low pricing C) cost-plus pricing D) break-even pricing E) penetration pricing Answer: B Page Ref: 293 Skill: Concept Objective: 10-2 Difficulty: Easy 18) Bon Vivant offers an assortment of exclusive French wines at incredibly low prices. These prices are neither limited-time offers nor special discounts, but represent the daily prices of products sold by Bon Vivant. This reflects Bon Vivant's ________ strategy. A) everyday low pricing B) markup pricing C) penetration pricing D) break-even pricing E) cost-based pricing Answer: A Page Ref: 293 Skill: Application Objective: 10-2 Difficulty: Moderate 19) ________ involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items. A) High-low pricing B) Everyday low pricing C) Cost-plus pricing D) Break-even pricing E) Penetration pricing Answer: A Page Ref: 293 Skill: Concept Objective: 10-2 Difficulty: Easy

6 Copyright © 2014 Pearson Education, Inc.

20) Department stores such as Kohl's and Macy's practice high-low pricing by ________. A) charging a constant, everyday low price B) providing few or no temporary price discounts C) increasing prices temporarily on select products D) having frequent sale days for store credit-card holders E) underpricing most consumer items Answer: D Page Ref: 293 AACSB: Analytic Skills Skill: Concept Objective: 10-2 Difficulty: Moderate 21) Companies that adopt value-added pricing ________. A) consider value-added features as a fitting substitute for aggressive cost cutting B) set incredibly low prices to meet competition C) attach value-added features and services to differentiate their offers and support their higher prices D) overprice their products without any apparent justification E) underprice their products and lower quality to boost demand in the short-run Answer: C Page Ref: 293 Skill: Concept Objective: 10-2 Difficulty: Easy 22) Which of the following is true with regard to value-added pricing? A) Companies that practice value-added pricing typically match the competition by cutting prices. B) Companies practicing value-added pricing differentiate their offers by attaching value-added features to offerings that, in turn, justify higher prices. C) The intrinsic value of products sold by companies practicing value-added pricing is far less than their actual selling price. D) Companies practicing value-added pricing primarily rely on cost differentiation. E) Value-added pricing is the most suitable pricing strategy in pure monopolies. Answer: B Page Ref: 293 Skill: Concept Objective: 10-2 Difficulty: Moderate

7 Copyright © 2014 Pearson Education, Inc.

23) In an effort to differentiate its offerings from its competitors, Pegasus Computers decided to add an extra USB port in all its laptops besides providing a free pair of Delphi power bass headphones with every Pegasus laptop. Although the additional features increased the price of the laptops by $500, Pegasus was confident that the strategy would help boost demand for its laptops substantially. This is an example of ________. A) good-value pricing B) markup pricing C) break-even pricing D) value-added pricing E) cost-based pricing Answer: D Page Ref: 293 AACSB: Analytic Skills Skill: Application Objective: 10-2 Difficulty: Hard 24) ________ involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk. A) Value-based pricing B) Competition-based pricing C) Cost-based pricing D) Penetration pricing E) Break-even pricing Answer: C Page Ref: 295 Skill: Concept Objective: 10-2 Difficulty: Easy 25) Companies with lower costs ________. A) specialize in selling products with value-added features B) usually market products with inferior quality, thereby justifying the low selling price C) can set lower prices that result in smaller margins but greater sales and profits D) tend to overprice products owing to their monopolistic advantage E) usually set higher prices that result in higher margins Answer: C Page Ref: 295 AACSB: Analytic Skills Skill: Concept Objective: 10-2 Difficulty: Moderate

8 Copyright © 2014 Pearson Education, Inc.

26) A company must pay each month's bills for rent, heat, interest, and executive salaries regardless of the company's level of output. This exemplifies its ________ costs. A) overhead B) variable C) target D) total E) unit Answer: A Page Ref: 296 Skill: Concept Objective: 10-2 Difficulty: Moderate 27) Overhead costs ________ as the number of units produced increases. A) decrease B) increase steadily C) fluctuate D) remain the same E) increase rapidly Answer: D Page Ref: 296 Skill: Concept Objective: 10-2 Difficulty: Easy 28) Which of the following is most likely a fixed cost? A) sales representative commissions B) product distribution costs C) manufacturing input costs D) temporary worker salaries E) facility rental payments Answer: E Page Ref: 296 Skill: Concept Objective: 10-2 Difficulty: Easy 29) Fixed costs ________. A) are costs that do not vary with production or sales level B) vary directly with the level of production C) decrease with accumulated production experience D) are the sum of the overhead and variable costs for any given level of production E) represent the annual costs of inputs incurred by a company Answer: A Page Ref: 296 Skill: Concept Objective: 10-2 Difficulty: Easy 9 Copyright © 2014 Pearson Education, Inc.

30) Costs that change with the level of production are referred to as ________. A) fixed costs B) variable costs C) target costs D) total costs E) overhead costs Answer: B Page Ref: 296 Skill: Concept Objective: 10-2 Difficulty: Easy 31) In 2011, the fixed costs of a company were $500,000, and its variable costs equalled $150,000. In 2010, the company made an annual profit of $200,000. It has been predicted that, despite a steady growth, the company's variable costs will likely equal $300,000 by 2013. The total costs of the company in 2011 were ________. A) $350,000 B) $450,000 C) $650,000 D) $800,000 E) $950,000 Answer: C Page Ref: 296 AACSB: Analytic Skills Skill: Application Objective: 10-2 Difficulty: Moderate 32) The total production costs at Kellner Machine Works are $87,000 out of which $45,000 represent fixed costs. Which of the following is representative of the variable costs incurred by the company? A) $35,000 B) $42,000 C) $45,000 D) $87,000 E) $132,000 Answer: B Page Ref: 296 AACSB: Analytic Skills Skill: Application Objective: 10-2 Difficulty: Moderate

10 Copyright © 2014 Pearson Education, Inc.

33) The fixed cost in manufacturing a single LED monitor is $40 and the variable cost is $12. If the company expects to manufacture 5,000 monitors, the total costs would be ________. A) $60,000 B) $200,000 C) $260,000 D) $420,000 E) $500,000 Answer: C Page Ref: 296 AACSB: Analytic Skills Skill: Application Objective: 10-2 Difficulty: Moderate 34) As production moves up, the average cost per unit decreases because ________. A) variable costs decrease B) of increasing diseconomies of scale C) fixed costs are spread over more units D) overhead costs decrease E) revenue increases Answer: C Page Ref: 296 Skill: Concept Objective: 10-2 Difficulty: Moderate 35) A cell phone manufacturing firm produced 1,000 cell phones a day but believed that it could reasonably step up production to 2,000 cell phones a day. Consequently, it built a larger plant and installed efficient machineries and work arrangements to realize the projected output. Which of the following can most likely be inferred from this information? A) The unit cost of producing 2,000 cell phones per day would be twice that of the unit cost of producing 1,000 units per day. B) A production plant with the capacity of producing 5,000 cell phones a day would be most efficient. C) The unit cost of producing 2,000 cell phones per day would be lower than the unit cost of producing 1,000 units per day. D) A 2,000-capacity production plant would be less efficient because of increasing diseconomies of scale. E) The fixed costs of the firm are more likely to increase with the increase in output. Answer: C Page Ref: 296 AACSB: Reflective Thinking Skills Skill: Critical Thinking Objective: 10-2 Difficulty: Hard

11 Copyright © 2014 Pearson Education, Inc.

36) The long-run average cost (LRAC) curve indicates the ________. A) per unit cost of output in the long run B) projected total production costs of competitors C) variable costs incurred by a firm over time D) fixed costs incurred by a firm over the long term E) number of units the market will buy in a given time period, at different prices that might be charged Answer: A Page Ref: 296 Skill: Concept Objective: 10-2 Difficulty: Easy 37) The learning curve is representative of the ________. A) per unit cost of output in the long run B) drop in the average per-unit production cost that comes with accumulated production experience C) number of units the market will buy in a given time period, at different prices that might be charged D) total market demand resulting from different prices E) per unit cost of output in the short run Answer: B Page Ref: 297 Skill: Concept Objective: 10-2 Difficulty: Easy 38) As production workers become better organized and more familiar with equipment, the average cost per unit tends to decrease with the ________. A) increase in the diseconomies of scale B) accumulated production experience C) decrease in the economies of scale D) increase in derived demand E) increase in primary demand Answer: B Page Ref: 296-297 Skill: Concept Objective: 10-2 Difficulty: Easy

12 Copyright © 2014 Pearson Education, Inc.

39) With accumulated production experience and a higher volume of production, companies not only become more efficient but also ________. A) gain economies of scale B) incur higher overhead costs C) create derived demand in the market D) spend more per unit of produced output E) tend to routinely spend less on inputs Answer: A Page Ref: 296 Skill: Concept Objective: 10-2 Difficulty: Easy 40) The experience curve reveals that ________. A) repetition in production has no visible impact on production costs B) repetition in production enhances efficiency C) the average cost of production remains the same with accumulated production experience D) repetition in production adds to the costs and thereby increases the prices of outputs E) the average cost of production increases with accumulated production experience Answer: B Page Ref: 296-297 AACSB: Analytic Skills Skill: Concept Objective: 10-2 Difficulty: Moderate 41) A downward-sloping experience curve is indicative of ________. A) the negative customer perception about a company's products B) the falling demand for a company's products C) the falling unit production cost of a company D) the low quality of a company's products E) slow and inadequate organizational learning Answer: C Page Ref: 297 AACSB: Analytic Skills Skill: Concept Objective: 10-2 Difficulty: Moderate

13 Copyright © 2014 Pearson Education, Inc.

42) Which of the following is most likely a risk associated with experience-curve pricing? A) High-volume production facilities are unable to meet demand. B) New technology often leads to productivity problems. C) Demand for the product fluctuates unpredictably. D) Consumers tend to prefer new brands over established ones. E) Aggressive pricing often gives a product a cheap image. Answer: E Page Ref: 297 Skill: Concept Objective: 10-2 Difficulty: Easy 43) Experience-curve pricing assumes that ________. A) competitors are weak and not willing to fight price cuts B) competitors are strong and invincible C) aggressive pricing adversely affects product image D) volume-based production slows down organizational learning E) lower-cost technologies are almost always inferior Answer: A Page Ref: 297 AACSB: Analytic Skills Skill: Concept Objective: 10-2 Difficulty: Moderate 44) The simplest pricing method is ________ pricing. A) value-based B) fixed cost C) cost-plus D) target return E) competition-based Answer: C Page Ref: 297 Skill: Concept Objective: 10-2 Difficulty: Easy

14 Copyright © 2014 Pearson Education, Inc.

45) Cost-plus pricing ________. A) is a complex pricing method B) involves pricing that accurately reflects production costs C) involves adding a standard markup for profit D) aims at breaking even on the costs of making and marketing a product E) is a value-based pricing method Answer: C Page Ref: 297 Skill: Concept Objective: 10-2 Difficulty: Easy 46) Lawyers, accountants, and other professionals typically price by adding a standard markup for profit. This exemplifies ________. A) target pricing B) cost-plus pricing C) value-based pricing D) break-even pricing E) penetration pricing Answer: B Page Ref: 297 Skill: Concept Objective: 10-2 Difficulty: Easy 47) Herbie Inc., a firm manufacturing sandwich makers, has fixed costs of $250,000, variable costs of $20 per unit of output, and expected unit sales of 50,000 units. What is the unit cost of a sandwich maker manufactured by Herbie? A) $15 B) $25 C) $30 D) $50 E) $75 Answer: B Page Ref: 297 AACSB: Reflective Thinking Skills Skill: Application Objective: 10-2 Difficulty: Hard

15 Copyright © 2014 Pearson Education, Inc.

48) Samsung Mobile plans to launch a new phone with a unit cost of $270 and wants to earn a 10 percent markup on its sales. Samsung's markup price is ________. A) $275 B) $280 C) $295 D) $300 E) $335 Answer: D Page Ref: 297 AACSB: Reflective Thinking Skills Skill: Application Objective: 10-2 Difficulty: Hard 49) Why is markup pricing most likely impractical? A) Calculating costs is complicated due to fluctuations. B) By tying the price to cost, sellers oversimplify pricing. C) When all firms in the industry use this pricing method, prices tend to be similar. D) The method ignores demand and competitor prices. E) With a standard markup, consumers know when they are being overcharged. Answer: D Page Ref: 298 AACSB: Analytic Skills Skill: Concept Objective: 10-2 Difficulty: Moderate 50) Why is markup pricing most likely popular? A) Sellers are more certain about demand than about costs. B) Markup pricing tends to maximize market competition. C) Markup pricing affords buyers greater bargaining power. D) Sellers do not need to make frequent adjustments as demand changes. E) Markup pricing is designed to set prices to break even on the costs of making and marketing a product. Answer: D Page Ref: 298 AACSB: Analytic Skills Skill: Concept Objective: 10-2 Difficulty: Moderate

16 Copyright © 2014 Pearson Education, Inc.

51) Which of the following is a cost-based approach to pricing? A) value-based pricing B) high-low pricing C) target return pricing D) good value pricing E) EDLP Answer: C Page Ref: 298 Skill: Concept Objective: 10-2 Difficulty: Easy 52) Target return pricing is a variation of which of the following cost-oriented pricing approaches? A) cost-plus pricing B) break-even pricing C) markup pricing D) value-based pricing E) fixed cost pricing Answer: B Page Ref: 298 Skill: Concept Objective: 10-2 Difficulty: Easy 53) Target return pricing uses the concept of a(n) ________, which shows the total cost and total revenue expected at different sales volume levels. A) BCG matrix B) break-even chart C) SWOT analysis D) demand curve E) experience curve Answer: B Page Ref: 298 Skill: Concept Objective: 10-2 Difficulty: Easy

17 Copyright © 2014 Pearson Education, Inc.

54) John assured his venture capitalists an earning of 25 percent return on equity when he began his IT start-up. In order to achieve this result, he will most likely use which of the following pricing approaches? A) value-based pricing B) markup pricing C) EDLP D) customer-based pricing E) target return pricing Answer: E Page Ref: 298 Skill: Application Objective: 10-2 Difficulty: Moderate 55) The break-even volume is the point at which ________. A) the total revenue and total cost curves intersect B) demand equals supply C) the production of one more unit will not lead to increase in demand D) the company can pay off all its long-term debt E) a firm exceeds the sales forecast Answer: A Page Ref: 298 AACSB: Analytic Skills Skill: Concept Objective: 10-2 Difficulty: Moderate 56) Which of the following statements about break-even analysis is true? A) It is used to determine how much production experience a company must have in order to achieve desired efficiencies. B) It is a technique used to calculate fixed costs. C) It determines the amount of retained earnings a company will have during a given accounting period. D) It is a technique marketers use to determine the relationship between supply and demand. E) It is calculated by using variable costs, the unit price, and fixed costs. Answer: E Page Ref: 298 AACSB: Analytic Skills Skill: Concept Objective: 10-2 Difficulty: Moderate

18 Copyright © 2014 Pearson Education, Inc.

57) A company faces fixed costs of $100,000 and variable costs of $8 per unit. It plans to directly sell its product in the market for $12. How many units must it produce and sell to break even? A) 20,000 B) 25,000 C) 30,000 D) 35,000 E) 40,000 Answer: B Page Ref: 298 AACSB: Analytic Skills Skill: Application Objective: 10-2 Difficulty: Hard 58) As a manufacturer increases the price, ________. A) efficiency drops B) the break-even volume drops C) competition is minimized D) the total costs increase E) the profit margin shrinks Answer: B Page Ref: 298 Skill: Concept Objective: 10-2 Difficulty: Easy 59) Mansfield Pharmaceuticals markets Zipro, an antibiotic. The firm has fixed costs of $1,000,000 and variable costs of $2 per bottle of 50 tablets priced at $10 per bottle. What is the break-even volume? A) 25,000 B) 55,000 C) 100,000 D) 115,000 E) 125,000 Answer: E Page Ref: 298 AACSB: Analytic Skills Skill: Application Objective: 10-2 Difficulty: Hard

19 Copyright © 2014 Pearson Education, Inc.

60) A manufacturer has fixed costs of $100,000, a variable cost of $10 per unit of output, and break-even volume of 50,000 units. What should the manufacturer's unit cost be in order to break even? A) $10 B) $12 C) $14 D) $16 E) $20 Answer: B Page Ref: 298 AACSB: Analytic Skills Skill: Application Objective: 10-2 Difficulty: Hard 61) Which of the following involves setting prices based on a rival firm's strategies, costs, prices, and market offerings? A) target return pricing B) good-value pricing C) competitor value-added pricing D) market-based pricing E) competition-based pricing Answer: E Page Ref: 299 Skill: Concept Objective: 10-2 Difficulty: Easy 62) Companies can legitimately charge a higher price if ________. A) consumers perceive that the company's product offers greater value B) the demand for products manufactured by a firm is highly elastic C) the cost of advertising is minimal D) derived demand remains constant E) consumers de-emphasize quality Answer: A Page Ref: 299 AACSB: Analytic Skills Skill: Concept Objective: 10-2 Difficulty: Moderate

20 Copyright © 2014 Pearson Education, Inc.

63) Which of the following is an external factor that affects pricing decisions in a company? A) the company's overall marketing strategy B) the nature of the market C) the organizational objectives of the company D) elements of the company's marketing mix E) the annual advertising budget of rival firms Answer: B Page Ref: 300 AACSB: Analytic Skills Skill: Concept Objective: 10-3 Difficulty: Moderate 64) Which of the following is an internal factor that affects pricing decisions in a company? A) the nature of the market B) the degree of inflation in the economy C) the overall marketing strategy of the company D) the forces of demand and supply in the market E) consumers' perception of value Answer: C Page Ref: 300 AACSB: Analytic Skills Skill: Concept Objective: 10-3 Difficulty: Moderate 65) Companies using target costing ________. A) first design a new product and then determine its cost B) tailor their products to be in line with the marketing mix C) routinely neglect customer value considerations D) avoid determining an ideal selling price until analyzing test market results E) start with an ideal selling price and then target costs that will ensure that the price is met Answer: E Page Ref: 300 AACSB: Analytic Skills Skill: Concept Objective: 10-3 Difficulty: Moderate

21 Copyright © 2014 Pearson Education, Inc.

66) Elmo Inc., a global conglomerate, designed the ElBrush, an electric toothbrush. Sensing market demand for the electric toothbrush, Elmo started with an ideal selling price of $3 based on customer value considerations and then targeted costs to ensure that the price was met. This exemplifies ________. A) competition-based pricing B) cost-plus pricing C) target costing D) everyday low pricing E) high-low pricing Answer: C Page Ref: 300 AACSB: Analytic Skills Skill: Application Objective: 10-3 Difficulty: Hard 67) PoolPak produces climate-control systems for large swimming pools. The company's customers are more concerned about service support for maintaining their systems than the initial price of the product. PoolPak specializes in and differentiates itself through both cutting-edge technologies used to build its high-value climate control systems as well as seamless quality service. PoolPak's prices are very high, but demand for its climate-control systems seems to be forever on the rise. This exemplifies ________. A) target costing B) a pure monopoly C) cost-plus pricing D) a nonprice position E) break-even pricing Answer: D Page Ref: 300 AACSB: Analytic Skills Skill: Application Objective: 10-3 Difficulty: Hard

22 Copyright © 2014 Pearson Education, Inc.

68) RedFin, a company marketing deep-sea diving equipment, charges very high prices for its products. Despite the availability of many low-priced products in the market, customers seem to prefer RedFin, which has earned a reputation for selling high-quality products. This exemplifies ________. A) a pure monopoly B) an oligopoly C) a nonprice position D) break-even pricing E) target costing Answer: C Page Ref: 300 AACSB: Analytic Skills Skill: Application Objective: 10-3 Difficulty: Moderate 69) A decision to position the product on high-performance quality will mean that the ________. A) seller must charge a higher price to cover higher costs B) seller must charge a lower price to attract more customers C) producer must step down production D) marketer must boost derived demand in the market E) break-even volume will be fairly low Answer: A Page Ref: 301 AACSB: Analytic Skills Skill: Concept Objective: 10-3 Difficulty: Moderate 70) Price setting is usually determined by ________ in small companies. A) the top managers B) the marketing department C) the sales department D) divisional managers E) product managers Answer: A Page Ref: 301 Skill: Concept Objective: 10-3 Difficulty: Easy

23 Copyright © 2014 Pearson Education, Inc.

71) Price setting is usually determined by ________ in large companies. A) the top managers B) the external stakeholders C) product managers D) non-executive employees E) the sales department Answer: C Page Ref: 301 Skill: Concept Objective: 10-3 Difficulty: Easy 72) In industrial markets, ________ typically has the final say in setting the pricing objectives and policies of a company. A) the sales manager B) top management C) the production manager D) the HR department E) the sales staff Answer: B Page Ref: 301 Skill: Concept Objective: 10-3 Difficulty: Easy 73) In industries in which pricing is a key factor, ________ often set the best prices or help others in setting them. A) sales departments B) salespeople C) production managers D) line managers E) pricing departments Answer: E Page Ref: 301 Skill: Concept Objective: 10-3 Difficulty: Easy

24 Copyright © 2014 Pearson Education, Inc.

74) Under ________, the market consists of many buyers and sellers trading in a uniform commodity. A) pure competition B) monopolistic competition C) oligopolistic competition D) a pure monopoly E) the dominant firm model Answer: A Page Ref: 301 Skill: Concept Objective: 10-3 Difficulty: Easy 75) Which of the following exemplifies a pure competitive market? A) a market where many buyers and sellers trade over a range of prices rather than a single market price B) a market where a single firm controls the larger fraction of the market share C) a market where a few powerful firms control the larger fraction of the market share D) a market characterized by only a few large sellers E) a market where many buyers and sellers trade in a uniform commodity Answer: E Page Ref: 301 AACSB: Analytic Skills Skill: Concept Objective: 10-3 Difficulty: Moderate 76) Which of the following is true of a pure competitive market? A) A single seller has a major effect on the current and future market price. B) Companies spend significantly on marketing research and product development. C) The advertising budget of companies is usually huge. D) Sellers try to develop differentiated offers for different customer segments. E) Sellers spend little time on marketing strategy. Answer: E Page Ref: 301 AACSB: Analytic Skills Skill: Concept Objective: 10-3 Difficulty: Moderate

25 Copyright © 2014 Pearson Education, Inc.

77) In Viña del Mar, Chile, a large number of shops specialize in selling the same quality of seafood products along the beach frequented by tourists. No individual shop dares charge more than the going price without fearing loss of business to other shop-owners. This exemplifies ________. A) pure competition B) monopolistic competition C) oligopolistic competition D) pure monopoly E) the dominant firm model Answer: A Page Ref: 301 AACSB: Analytic Skills Skill: Application Objective: 10-3 Difficulty: Hard 78) Under ________, the market consists of many buyers and sellers who trade over a range of prices rather than a single market price. A) pure competition B) monopolistic competition C) oligopolistic competition D) a pure monopoly E) the dominant firm model Answer: B Page Ref: 301 Skill: Concept Objective: 10-3 Difficulty: Easy 79) Which of the following is true with regard to pure competition? A) Under pure competition, no single buyer or seller has much effect on the going market price. B) In a purely competitive market, marketing research is of utmost importance. C) In a purely competitive market, product development is the focus of most firms. D) Under pure competition, the market consists of many buyers and sellers who trade over a range of prices rather than a single market price. E) Under pure competition, the market consists of only a few large sellers. Answer: A Page Ref: 302 AACSB: Analytic Skills Skill: Concept Objective: 10-3 Difficulty: Moderate

26 Copyright © 2014 Pearson Education, Inc.

80) The movie industry in a country is controlled by six large studios that receive 90 percent of the annual revenues from movies. This is an example of a(n) ________. A) pure competition B) monopolistic competition C) oligopolistic competition D) pure monopoly E) government monopoly Answer: C Page Ref: 301 AACSB: Analytic Skills Skill: Application Objective: 10-3 Difficulty: Hard 81) In which situation is the market dominated by one seller? A) pure monopoly B) monopolistic competition C) oligopolistic competition D) pure competition E) free market Answer: A Page Ref: 302 Skill: Concept Objective: 10-3 Difficulty: Easy 82) Under oligopolistic competition ________. A) the market consists of a single dominant seller B) the market consists of numerous small sellers C) the market consists of many buyers and sellers who trade over a range of prices rather than a single market price D) sellers are typically unresponsive to competitors' pricing strategies and marketing moves E) the market consists of only a few large sellers Answer: E Page Ref: 302 Skill: Concept Objective: 10-3 Difficulty: Easy

27 Copyright © 2014 Pearson Education, Inc.

83) Which of the following shows the number of units the market will buy in a given time period, at different prices that might be charged? A) demand curve B) supply curve C) learning curve D) break-even pricing E) target costing Answer: A Page Ref: 302 Skill: Concept Objective: 10-3 Difficulty: Easy 84) Which of the following is true about the demand curve? A) A demand curve indicates the drop in the average per-unit production cost that comes with accumulated production experience. B) A demand curve indicates the cost per unit of output in the long run. C) A demand curve indicates the cost per unit of output in the short run. D) In a monopoly, the demand curve does not indicate the total market demand resulting from different prices. E) A demand curve shows the number of units the market will buy in a given time period at different prices that might be charged Answer: E Page Ref: 302 AACSB: Analytic Skills Skill: Concept Objective: 10-3 Difficulty: Moderate 85) Bruno Servers has decided to decrease its prices on its popular higher-range servers. The company can reasonably expect ________ to increase. A) fixed costs B) variable costs C) demand D) additional value E) overhead costs Answer: C Page Ref: 302 AACSB: Analytic Skills Skill: Application Objective: 10-3 Difficulty: Moderate

28 Copyright © 2014 Pearson Education, Inc.

86) ________ refers to a measure of the sensitivity of demand to changes in price. A) Price elasticity B) Cross-elasticity of demand C) Elasticity of substitution D) Marginal utility E) Income elasticity of demand Answer: A Page Ref: 303 Skill: Concept Objective: 10-3 Difficulty: Easy 87) If demand hardly changes with a small change in price, the demand is ________. A) variable B) inelastic C) highly elastic D) derived E) negative Answer: B Page Ref: 302-303 Skill: Concept Objective: 10-3 Difficulty: Easy 88) If demand changes greatly with a small change in price, the demand is ________. A) variable B) inelastic C) derived D) elastic E) negative Answer: D Page Ref: 303 Skill: Concept Objective: 10-3 Difficulty: Easy 89) Price elasticity of demand is represented by ________ divided by ________. A) percentage change in quantity demanded; percent change in price B) percentage change in units supplied; percentage change in price C) percentage change in price; percentage change in quantity demanded D) fixed costs; variable costs E) cost-plus price; actual cost of production Answer: A Page Ref: 303 Skill: Concept Objective: 10-3 Difficulty: Moderate 29 Copyright © 2014 Pearson Education, Inc.

90) When the price of a pack of Crispo potato wafers was increased from $4 to $5, the quantity demanded by local retail stores went down by 50%. Hence, the price elasticity of demand for Crispo is ________. A) -2 B) 2 C) 4 D) -4 E) 0.5 Answer: A Page Ref: 303 AACSB: Analytic Skills Skill: Application Objective: 10-3 Difficulty: Hard 91) There was a 35 percent increase in demand for a product after the seller decreased its price by 14 percent. Therefore, the price elasticity of demand is ________. A) 0.25 B) 0.4 C) -2.5 D) 2.5 E) -25 Answer: D Page Ref: 303 AACSB: Analytic Skills Skill: Application Objective: 10-3 Difficulty: Hard 92) Buyers are less price sensitive when ________. A) the product they are buying is of inferior quality B) the product they are buying is low in prestige C) substitute products are easy to find D) the product they are buying is unique E) the product they are buying is non-exclusive Answer: D Page Ref: 303 AACSB: Analytic Skills Skill: Concept Objective: 10-3 Difficulty: Moderate

30 Copyright © 2014 Pearson Education, Inc.

93) ________, the more it pays for the seller to raise the price. A) The less inelastic the demand B) The less elastic the demand C) The less the quality of tied services D) The more the sensitivity toward small price changes E) The more intense the competition Answer: B Page Ref: 303 AACSB: Analytic Skills Skill: Concept Objective: 10-3 Difficulty: Moderate 94) Dips in the economy and the instant price comparisons made possible by the Internet have contributed to ________. A) decreased consumer price sensitivity B) increased consumer price sensitivity C) a less direct relationship between supply and demand D) low brand equity for luxury goods E) decreased brand loyalty Answer: B Page Ref: 303 AACSB: Use of Information Technology Skill: Concept Objective: 10-3 Difficulty: Moderate 95) In the aftermath of the Great Recession, consumers ________. A) have become more value conscious B) have become less value conscious C) exhibit great interest in prestige pricing D) show no interest in price cutting E) rarely endorse value-for-money deals Answer: A Page Ref: 303 AACSB: Dynamics of the Global Economy Skill: Concept Objective: 10-3 Difficulty: Moderate

31 Copyright © 2014 Pearson Education, Inc.

96) When companies set prices, the government and social concerns are ________ affecting pricing decisions. A) external factors B) internal factors C) economic factors D) cultural factors E) organizational factors Answer: A Page Ref: 304 Skill: Concept Objective: 10-3 Difficulty: Easy Refer to the scenario below to answer the following questions. Alden Manufacturing produces small kitchen appliances—blenders, hand mixers, and electric skillets—under the brand name First Generation. Alden attempts to target newlyweds and firsttime home buyers with this brand. Considering that most young households have limited financial resources, Alden attempts to engage in target costing. "In doing this," says Milt Alden, the co-founder of Alden Electronics, "we have better control over keeping price right in line with customers." Alden manufactures a three-speed blender, its top seller, along with a five-speed blender. The hand mixers are manufactured in two variants—a small handheld mixer with two rotating beaters and another that comes with an optional stand and an attached mixing bowl. Alden's temperaturecontrolled skillets are manufactured in a single style with three color options. "Our product offerings are narrower," Milt Alden added, "but our line workers know each product like the back of their hands. This allows us to produce superior products while holding our prices low. 97) Milt Alden says that his line workers "know each product like the back of their hands," and that this knowledge helps the company keep its prices low. This indicates that Alden Manufacturing most likely benefits from the ________. A) cost-plus pricing B) value-added pricing C) experience curve D) inelastic demand in the market E) derived demand in the market Answer: C Page Ref: 297 AACSB: Analytic Skills Skill: Application Objective: 10-2 Difficulty: Hard

32 Copyright © 2014 Pearson Education, Inc.

98) Milt Alden uses which of the following strategies for pricing his products? A) basing company price on competitors' prices B) using everyday low pricing C) initiating an aggressive promotional campaign D) starting with customer-value considerations E) focusing on overall fixed costs of manufacturing Answer: D Page Ref: 300 AACSB: Analytic Skills Skill: Application Objective: 10-3 Difficulty: Hard 99) If Alden raises the price of the handheld mixer by 2 percent and then the quantity demanded falls by 10 percent, what is the price elasticity of demand? A) -5 B) -8 C) -12 D) 5 E) 12 Answer: A Page Ref: 303 AACSB: Reflective Thinking Skills Skill: Application Objective: 10-4 Difficulty: Hard 100) Prices have a direct impact on a firm's bottom line. Answer: TRUE Page Ref: 290 Skill: Concept Objective: 10-1 Difficulty: Easy 101) Customer perceptions of the product's value set the floor for prices. Answer: FALSE Page Ref: 291 Skill: Concept Objective: 10-2 Difficulty: Easy

33 Copyright © 2014 Pearson Education, Inc.

102) Product costs set the ceiling for prices. Answer: FALSE Page Ref: 291 AACSB: Analytic Skills Skill: Concept Objective: 10-2 Difficulty: Easy 103) In customer value-based pricing, price is considered along with all other marketing mix variables before the marketing program is set. Answer: TRUE Page Ref: 291 AACSB: Analytic Skills Skill: Concept Objective: 10-2 Difficulty: Moderate 104) Value-based pricing uses the sellers' perception of value as the key to pricing. Answer: FALSE Page Ref: 291 Skill: Concept Objective: 10-2 Difficulty: Easy 105) Using value-based pricing, a marketer would not design a product and marketing program before setting the price. Answer: TRUE Page Ref: 291 AACSB: Analytic Skills Skill: Application Objective: 10-2 Difficulty: Moderate 106) Cost-based pricing is often product driven. Answer: TRUE Page Ref: 291 Skill: Concept Objective: 10-2 Difficulty: Easy 107) Department stores that practice everyday low pricing (EDLP) typically provide frequent sale days, early-bird savings, and bonus earnings for store credit-card holders. Answer: FALSE Page Ref: 293 Skill: Concept Objective: 10-2 Difficulty: Moderate 34 Copyright © 2014 Pearson Education, Inc.

108) Overhead costs are costs that do not vary with production or sales level. Answer: TRUE Page Ref: 296 Skill: Concept Objective: 10-2 Difficulty: Easy 109) Cost-based pricing involves setting prices based on consumer perception of value. Answer: FALSE Page Ref: 295 Skill: Concept Objective: 10-2 Difficulty: Easy 110) Average cost tends to increase with accumulated production experience. Answer: FALSE Page Ref: 297 Skill: Concept Objective: 10-2 Difficulty: Easy 111) A downward-sloping experience curve is indicative of a company's rapidly increasing production costs. Answer: FALSE Page Ref: 297 Skill: Concept Objective: 10-2 Difficulty: Easy 112) The simplest pricing method is cost-plus pricing, which involves adding a standard markup to the cost of the product. Answer: TRUE Page Ref: 297 Skill: Concept Objective: 10-2 Difficulty: Easy 113) Markup pricing is popular because when all firms in the industry use this pricing method, prices tend to be similar, so price competition is minimized. Answer: TRUE Page Ref: 298 Skill: Concept Objective: 10-2 Difficulty: Easy

35 Copyright © 2014 Pearson Education, Inc.

114) Markup pricing is used when a firm tries to determine the price at which it will break even or make the target return it is seeking. Answer: FALSE Page Ref: 298 Skill: Concept Objective: 10-2 Difficulty: Easy 115) A break-even chart shows the total cost and total revenue expected at various sales volume levels. Answer: TRUE Page Ref: 298 Skill: Concept Objective: 10-2 Difficulty: Easy 116) Internal factors affecting pricing include the company's overall marketing strategy, objectives, and marketing mix. Answer: TRUE Page Ref: 300 Skill: Concept Objective: 10-3 Difficulty: Easy 117) Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective integrated marketing mix program. Answer: TRUE Page Ref: 302 AACSB: Analytic Skills Skill: Concept Objective: 10-3 Difficulty: Easy 118) In a pure monopoly, the market consists of many buyers and sellers who trade over a range of prices rather than a single market price. Answer: FALSE Page Ref: 302 AACSB: Analytic Skills Skill: Concept Objective: 10-3 Difficulty: Easy

36 Copyright © 2014 Pearson Education, Inc.

119) A demand curve shows the number of units the market will buy in a given time period at different prices that might be charged. Answer: TRUE Page Ref: 302 Skill: Concept Objective: 10-3 Difficulty: Easy 120) If a company faces competition, its demand at different prices will depend on whether competitors' prices stay constant or change with the company's own prices. Answer: TRUE Page Ref: 302 Skill: Concept Objective: 10-3 Difficulty: Moderate 121) If demand changes greatly with price, the demand is inelastic. Answer: FALSE Page Ref: 303 Skill: Concept Objective: 10-3 Difficulty: Easy 122) The more elastic the demand, the more it pays for the seller to raise the price. Answer: FALSE Page Ref: 303 AACSB: Analytic Skills Skill: Concept Objective: 10-3 Difficulty: Moderate 123) Buyers are more price sensitive when the product they are buying is unique or when it is high in quality, prestige, or exclusiveness. Answer: FALSE Page Ref: 303 AACSB: Analytic Skills Skill: Concept Objective: 10-3 Difficulty: Moderate 124) If demand is elastic rather than inelastic, sellers will consider lowering their prices. Answer: TRUE Page Ref: 304 AACSB: Analytic Skills Skill: Concept Objective: 10-3 Difficulty: Moderate 37 Copyright © 2014 Pearson Education, Inc.

125) Define price. Discuss its importance. Answer: In the narrowest sense, price is the amount of money charged for a product or a service. More broadly, price is the sum of all the values that customers give up to gain the benefits of having or using a product or service. Historically, price has been the major factor affecting buyer choice. In recent decades, however, nonprice factors have gained increasing importance. Even so, price remains one of the most important elements that determines a firm's market share and profitability. Price is the only element in the marketing mix that produces revenue; all other elements represent costs. Price is also one of the most flexible marketing mix elements. Unlike product features and channel commitments, prices can be changed quickly. At the same time, pricing is the number one problem facing many marketing executives, and many companies do not handle pricing well. Some managers view pricing as a big headache, preferring instead to focus on other marketing mix elements. However, smart managers treat pricing as a key strategic tool for creating and capturing customer value. Prices have a direct impact on a firm's bottom line. A small percentage improvement in price can generate a large percentage increase in profitability. More important, as part of a company's overall value proposition, price plays a key role in creating customer value and building customer relationships. Page Ref: 290 Skill: Concept Objective: 10-1 Difficulty: Moderate 126) Distinguish between value-based pricing and cost-based pricing. Answer: Customer value-based pricing uses buyers' perceptions of value as the key to pricing. Value-based pricing means that the marketer cannot design a product and marketing program and then set the price. Price is considered along with all other marketing mix variables before the marketing program is set. Although costs are an important consideration in setting prices, cost-based pricing is often product driven. The company designs what it considers to be a good product, adds up the costs of making the product, and sets a price that covers costs plus a target profit. Marketing must then convince buyers that the product's value at that price justifies its purchase. Page Ref: 291 Skill: Concept Objective: 10-2 Difficulty: Moderate 127) Explain break-even pricing. Answer: Break-even pricing (target return pricing) refers to setting price to break even on the costs of making and marketing a product, or setting price to make a target return. Target return pricing uses the concept of a break-even chart, which shows the total cost and total revenue expected at different sales volume levels. Page Ref: 298 Skill: Concept Objective: 10-2 Difficulty: Moderate

38 Copyright © 2014 Pearson Education, Inc.

128) What are the different internal factors that affect a firm's pricing decisions? Answer: Beyond customer value perceptions, costs, and competitor strategies, the company must consider several additional internal and external factors. Internal factors affecting pricing include the company's overall marketing strategy, objectives, and marketing mix, as well as other organizational considerations. Price is only one element of the company's broader marketing strategy. If the company has selected its target market and positioning carefully, then its marketing mix strategy, including price, will be fairly straightforward. Some companies position their products on price and then tailor other marketing mix decisions to the prices they want to charge. Other companies deemphasize price and use other marketing mix tools to create nonprice positions. Page Ref: 300 Skill: Concept Objective: 10-3 Difficulty: Moderate 129) Compare and contrast pure competition and oligopolistic competition. Answer: Under pure competition, the market consists of many buyers and sellers trading in a uniform commodity, such as wheat, copper, or financial securities. No single buyer or seller has much effect on the going market price. In a purely competitive market, marketing research, product development, pricing, advertising, and sales promotion play little or no role. Thus, sellers in these markets do not spend much time on marketing strategy. On the other hand, under oligopolistic competition, the market consists of only a few large sellers. Because there are few sellers, each seller is alert and responsive to competitors' pricing strategies and marketing moves. Page Ref: 301-302 Skill: Synthesis Objective: 10-3 Difficulty: Hard 130) Briefly discuss monopolistic competition. Answer: Under monopolistic competition, the market consists of many buyers and sellers who trade over a range of prices rather than a single market price. A range of prices occurs because sellers can differentiate their offers to buyers. Because there are many competitors, each firm is less affected by competitors' pricing strategies than in oligopolistic markets. Sellers try to develop differentiated offers for different customer segments and, in addition to price, freely use branding, advertising, and personal selling to set their offers apart. Page Ref: 302 AACSB: Analytic Skills Skill: Concept Objective: 10-3 Difficulty: Moderate

39 Copyright © 2014 Pearson Education, Inc.

131) What is a demand curve? Explain its importance in the context of pricing decisions. Answer: A demand curve shows the number of units the market will buy in a given time period, at different prices that might be charged. Each price the company might charge will lead to a different level of demand. The relationship between the price charged and the resulting demand level is shown in the demand curve. The demand curve shows the number of units the market will buy in a given time period at different prices that might be charged. In the normal case, demand and price are inversely related—that is, the higher the price, the lower the demand. Thus, the company would sell less if it raised its price from P1 to P2. In short, consumers with limited budgets probably will buy less of something if its price is too high. Understanding a brand's price-demand curve is crucial to good pricing decisions. Most companies try to measure their demand curves by estimating demand at different prices. The type of market makes a difference. In a monopoly, the demand curve shows the total market demand resulting from different prices. If the company faces competition, its demand at different prices will depend on whether competitors' prices stay constant or change with the company's own prices. Page Ref: 303 Skill: Concept Objective: 10-3 Difficulty: Moderate 132) Explain price elasticity. What determines the elasticity of demand? Answer: Price elasticity refers to a measure of the sensitivity of demand to changes in price. If demand hardly changes with a small change in price, the demand is inelastic. If demand changes greatly, it is elastic. Buyers are less price sensitive when the product they are buying is unique or when it is high in quality, prestige, or exclusiveness; substitute products are hard to find or when they cannot easily compare the quality of substitutes; and the total expenditure for a product is low relative to their income or when the cost is shared by another party. Page Ref: 303 Skill: Concept Objective: 10-3 Difficulty: Moderate

40 Copyright © 2014 Pearson Education, Inc.

133) Briefly describe how economic conditions impact a firm's pricing strategies. Answer: Economic conditions can have a strong impact on a firm's pricing strategies. Economic factors such as a boom or recession, inflation, and interest rates affect pricing decisions because they affect consumer spending, consumer perceptions of the product's price and value, and the company's costs of producing and selling a product. In the aftermath of the recent Great Recession, many consumers have rethought the price-value equation. They have tightened their belts and become more value conscious. Consumers will likely continue their thriftier ways well beyond any economic recovery. As a result, many marketers have increased their emphasis on value-for-the-money pricing strategies. The most obvious response to the new economic realities is to cut prices and offer discounts. Thousands of companies have done just that. Lower prices make products more affordable and help spur short-term sales. However, such price cuts can have undesirable long-term consequences. Lower prices mean lower margins. Deep discounts may cheapen a brand in consumers' eyes. And once a company cuts prices, it is difficult to raise them again when the economy recovers. Page Ref: 304 Skill: Concept Objective: 10-3 Difficulty: Moderate 134) "Beyond the market and the economy, the company must consider several other factors in its external environment when setting prices." Explain this statement. Answer: Beyond the market and the economy, the company must consider several other factors in its external environment when setting prices. It must know what impact its prices will have on other parties in its environment. How will resellers react to various prices? The company should set prices that give resellers a fair profit, encourage their support, and help them to sell the product effectively. The government is another important external influence on pricing decisions. Finally, social concerns may need to be taken into account. In setting prices, a company's shortterm sales, market share, and profit goals may need to be tempered by broader societal considerations. Page Ref: 303-304 Skill: Concept Objective: 10-3 Difficulty: Moderate 135) List some important characteristics of price. Answer: Price is the only element in the marketing mix that produces revenue; all other elements represent costs. Price is also one of the most flexible marketing mix elements. Unlike product features and channel commitments, prices can be changed quickly. Page Ref: 290 Skill: Concept Objective: 10-1 Difficulty: Moderate

41 Copyright © 2014 Pearson Education, Inc.

136) Why is price considered one of the most flexible elements of the marketing mix? Answer: Unlike product features and channel commitments, prices can be changed quickly. Page Ref: 290 Skill: Concept Objective: 10-1 Difficulty: Easy 137) Explain the concept of price floor. Answer: Price floor represents the price below which there is no profit. Page Ref: 291 Skill: Concept Objective: 10-2 Difficulty: Easy 138) Explain the concept of price ceiling. Answer: Price ceiling represents the price above which there is no demand. Page Ref: 291 Skill: Concept Objective: 10-2 Difficulty: Easy 139) Briefly describe the process of value-based pricing. Answer: The company first assesses customer needs and value perceptions. It then sets its target price based on customer perceptions of value. The targeted value and price drive decisions about what costs can be incurred and the resulting product design. As a result, pricing begins with analyzing consumer needs and value perceptions, and the price is set to match perceived value. Page Ref: 292 Skill: Concept Objective: 10-2 Difficulty: Moderate 140) What is good-value pricing? Answer: Good-value pricing refers to offering just the right combination of quality and good service at a fair price. Page Ref: 292 Skill: Concept Objective: 10-2 Difficulty: Easy 141) What is high-low pricing? Answer: High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items. Page Ref: 293 Skill: Concept Objective: 10-2 Difficulty: Easy 42 Copyright © 2014 Pearson Education, Inc.

142) Define total costs. Answer: Total costs are the sum of the fixed and variable costs for any given level of production. Page Ref: 296 Skill: Concept Objective: 10-2 Difficulty: Easy 143) Explain the significance of a downward-sloping experience curve. Answer: If a downward-sloping experience curve exists, this is highly significant for the company. Not only will the company's unit production cost fall, but it will fall faster if the company makes and sells more during a given time period. Page Ref: 297 Skill: Concept Objective: 10-2 Difficulty: Moderate 144) A marketer's fixed costs are $400,000. The variable cost is $16 per unit, and the price of the product is $24 per unit. If the company wants to make a profit, how many units must it sell and at what price? Answer: If the company wants to make a profit, it must sell more than 50,000 units at $24 each. Page Ref: 298 AACSB: Analytic Skills Skill: Application Objective: 10-2 Difficulty: Hard 145) A marketer's fixed costs are $400,000, the variable cost is $16 per unit, and the price of the product is $24 per unit. What is the company's break-even point in dollar sales? Answer: The break-even point in dollar sales is $1,200,000. Page Ref: 298 AACSB: Analytic Skills Skill: Application Objective: 10-2 Difficulty: Hard 146) What is competition-based pricing? Answer: Competition-based pricing refers to setting prices based on competitors' strategies, prices, costs, and market offerings. Page Ref: 298 Skill: Concept Objective: 10-2 Difficulty: Easy

43 Copyright © 2014 Pearson Education, Inc.

147) Who typically sets prices in large and small companies? Answer: In small companies, prices are often set by top management rather than by the marketing or sales departments. In large companies, pricing is typically handled by divisional or product managers. Page Ref: 301 Skill: Concept Objective: 10-3 Difficulty: Easy 148) What is a pure monopoly? Answer: In a pure monopoly, the market is dominated by one seller. The seller may be a government monopoly, a private regulated monopoly, or a private unregulated monopoly. Pricing is handled differently in each case. Page Ref: 302 Skill: Concept Objective: 10-3 Difficulty: Easy 149) If demand falls by 15 percent when a seller raises its price by 3 percent, what will be the price elasticity of demand? Is the demand elastic or inelastic? Answer: The price elasticity of demand is –5 (the minus sign confirms the inverse relation between price and demand), and demand is elastic. Page Ref: 303 AACSB: Analytic Skills Skill: Application Objective: 10-3 Difficulty: Moderate

44 Copyright © 2014 Pearson Education, Inc.