Chapter 19—Pricing Concepts
TRUE/FALSE
1. Price is defined as the perceived value of a good or service that is exchanged for a certain dollar
amount.
2. Profit is the price charged to customers multiplied by the number of units sold.
3. Today’s firms must develop specific, measurable, and attainable pricing objectives if they hope to
survive in highly competitive markets.
4. The only way to maximize profits is to reduce costs by operating more efficiently.
5. Target return on investment is the most common profit objective used by firms.
6. Market share is a company’s product sales as a percentage of its total sales for that industry.
7. Maximization of cash should be a long-term objective.
8. In most communities, the price of gas is more or less the same at all area service stations. This is an
example of sales-oriented pricing.
9. When pricing goals are mainly sales oriented, cost considerations usually dominate.
10. Profit maximization is the price at which supply and demand are equal, and there is no inclination for
prices to rise or fall.
11. If demand for milk is inelastic, consumers will not change their purchasing habits greatly when the
price of milk changes.
12. If the formula for elasticity results in a measure of elasticity (E) greater than 1, demand is said to be
inelastic.
13. Research indicates that when a country’s inflation rate is high, demand becomes more elastic.
14. When many substitute products are available, demand is inelastic.
15. A lack of pricing power means that when a company tries to raise its prices, it loses sales volume as
customers shift to low cost competitors or find a substitute product.
16. Yield management systems can only be used by service industries.
17. Firms that price their products solely on the basis of costs are adhering to the marketing concept.
18. The owner of Buffalo Mountain Coffee Shop pays the same amount in rent each month no matter how
many customers she serves. The shop owner’s rent is an example of a marginal cost.
19. Variable costs vary with changes in the level of output, whereas marginal costs do not vary as output
changes.
20. Markup pricing, adding an amount to cost to cover expenses and profit, is one of the most common
pricing methods used by intermediaries to establish a selling price.
21. A firm has maximized its profits when its marginal revenue exceeds its marginal cost.
22. Break-even analysis determines what sales volume must be reached for a product before the company’s
total revenue equals total costs.
23. As products enter the growth stage of the product life cycle, prices generally begin to stabilize.
24. The manufacturers that remain in the market toward the end of the maturity stage typically offer
similar prices.
25. Prices always steadily decline for a product in the decline stage of the product life cycle.
26. Adequate distribution for a new product is often obtained by reducing the size of the profit margin for
its resellers.
27. If a shopping bot steers you to an exceptionally low price, you should suspect Internet fraud.
28. The B2B Internet auction world is shifting from using warranties, delivery dates, and financing options
as bargaining chips to haggling over prices.
29. Price should not be used as a promotional tool.
30. When a retailer offers a price-matching guarantee, it is signaling to the target market that it is
positioned as a low-price dealer.
31. High purchase prices may create feelings of pleasure and excitement in consumers.
32. Research has shown that products that are perceived to be of high quality tend to benefit less from
price promotions than products perceived to be of lower quality.
MULTIPLE CHOICE
1. Price is best described as:
a.
that which is given up in exchange to acquire a good or service
b.
money exchanged for a good or service
c.
the psychological results of purchasing
d.
the cost in dollars for a good or service as set by the producer
e.
the value of a barter good in an exchange
2. At Walmart, Randi saw a bag of daffodil flower bulbs and a box of plant fertilizer. The items, which
were sold together, retailed at $28.50, but were marked down to $19.99. The $19.99 is the:
a.
revenue
b.
price
c.
profit
d.
liquidity value
e.
amortized value
3. All of the following statements about price are true EXCEPT:
a.
Price can relate to anything with perceived value, not just money.
b.
Price is that which is given up in an exchange to acquire a product.
c.
Price means the same thing to the consumer and the seller.
d.
The price paid is based on the satisfaction consumers expect to receive from a product.
e.
Customers are interested in obtaining a perceived reasonable price.
4. When goods and services are exchanged, the trade is called:
a.
exchange
b.
substitution
c.
barter
d.
swap
e.
bargaining
5. Revenue:
a.
equals quantity sold times profit margin
b.
equals price minus costs
c.
equals return on investment
d.
is synonymous with profit
e.
equals price of goods times quantity sold
6. _____ pay for every activity of the company.
a.
Revenues
b.
Investments
c.
Retained earnings
d.
Profits
e.
Prices
7. At Walmart, Randi saw a bag of daffodil flower bulbs and a box of plant fertilizer. The items, which
were sold together, retailed at $28.50, but were marked down to $19.99. The retailer sold one at the
$28.50 price and five at the $19.99. The retailer’s revenue is:
a.
$8.51
b.
$19. 99
c.
$28.50
d.
$128.45
e.
$171.00
8. Money that is left over after paying for company activities is called:
a.
return on investment
b.
a contribution margin
c.
profit
d.
net worth
e.
a current asset
9. Why are marketing managers finding it more difficult to set prices in today’s environment?
a.
Inflationary and recessionary periods have made customers less price-sensitive.
b.
Fewer dealer and generic brands are available because the competition has been
eliminated.
c.
The high rate of new-product introductions has led to careful reevaluation by consumers.
d.
Marketing managers are finding it difficult to compare prices between suppliers.
e.
Buyers are less informed and are less price-sensitive.
10. For convenience, pricing objectives can be divided into three categories. They are:
a.
refundable, competitive, and attainable
b.
perceived, actual, and unique-situational
c.
differentiated, niche, and undifferentiated
d.
profit oriented, sales oriented, and status quo
e.
monopolistic, fixed, and variable
11. An organization is using _____ when it sets its prices so that total revenue is as large as possible
relative to total costs.
a.
profit maximization
b.
market share pricing
c.
demand-oriented pricing
d.
sales maximization
e.
status quo pricing
12. When Apple Inc. originally introduced its iPhone it was priced at what many believed to be about as
high as the market would allow. Within weeks Apple lowered the price of the iPhone. It appears that
Apple Inc. entered the market with a _____ approach to pricing the iPhone.
a.
market share pricing
b.
profit maximization
c.
demand-oriented
d.
sales maximization
e.
status quo pricing
13. When Insight Research Associates quotes a marketing research project, management will first estimate
the cost to conduct the research and produce and deliver the final client report. The next step in
determining the price is to add 30% to that cost estimate. This becomes the price estimate given to the
potential research client. This suggests that Insight Research Associates uses a(n) _____ pricing
objective.
a.
profit-oriented
b.
market share maximization
c.
status quo
d.
sales maximization
e.
supply-demand equalization
14. Thompson Pool and Patio is known for quality pool installations, excellent customer service, and
reasonable prices. If you want to have a Thompson pool you will have to wait about six months due to
demand for their product. While Thompson could probably price their product higher, given the
demand, they don’t. Instead, they set price so that they earn a reasonable level of profits. This
company seems to base its pricing policy on:
a.
profit maximization
b.
earning satisfactory profits
c.
creating retained earnings
d.
making the most money as possible
e.
decreasing consumer demand
15. _____ is equal to net profit after taxes divided by total assets.
a.
Return on investment
b.
Economic order quantity
c.
Target-on-sales
d.
Retained earnings
e.
Efficiency maximization
16. Pierre’s Ice Cream Company produces ultra–rich ice cream, which it sells in the Cleveland, Ohio area.
Last year, it managed to exceed its target return on investment (ROI) for the current fiscal year. The
following results were found on its financial statements:
Gross Revenues:
$250,000
Total Assets:
$500,000
Gross Profits:
$100,000
Total Liabilities:
$200,000
Net Profits after Tax:
$50,000
Owner’s Equity:
$300,000
What was the actual ROI for Pierre’s Ice Cream Company?
a.
6.67 percent
b.
10 percent
c.
22 percent
d.
28 percent
e.
100 percent
17. Britney is fifteen years old and wants to open her own business selling cupcakes to local coffee shops
and restaurants. She is having a tough time deciding whether to base her pricing objectives on market
share, dollar sales, or unit sales. Regardless of which she chooses, her pricing objective can be
categorized as:
a.
status quo
b.
profit oriented
c.
need oriented
d.
cost oriented
e.
sales oriented
18. At a price of $1,192,057, the Bugatti Veyron may be the most expensive street legal car currently on
the market today. Obviously, Bugatti is NOT using a _____ pricing objective in setting the price for
this car.
a.
inelastic or supply-oriented
b.
market share or sales maximization
c.
profit maximization or target return on investment
d.
status quo or satisfactory profits
e.
demand-oriented or supply-oriented
19. A company using market share pricing has a _____ pricing objective.
a.
profit-oriented
b.
sales-oriented
c.
demand-oriented
d.
supply-oriented
e.
status quo
20. _____ is a company’s product sales as a percentage of total sales for that industry.
a.
Return on investment
b.
Profit share
c.
Revenue share
d.
Market share
e.
Contribution
21. At the end of the summer, the Bloomin’ Garden Center reduced the price on all of its plants, fertilizer,
and potting soil by 50 percent in order to liquidate this inventory. What type of pricing strategy is
being used in this example?
a.
supply oriented
b.
sales maximization
c.
target return on investment
d.
satisfactory profit
e.
profit maximization
22. Dixie Furniture Company has recently moved to a new, larger location. At this new location, it has
been unable to attract sufficient customers. Its owner does not have the cash to pay the current loan
installment due on the building and inventory so he decided to reduce all merchandise prices by at
least 50 percent for a weekend sale to earn enough to make his loan payment. His pricing objective can
be classified as:
a.
market share maximization
b.
satisfactory profits
c.
asset maximization
d.
sales maximization
e.
target ROI
23. As a short-term pricing objective, _____ can be effectively used on a temporary basis to sell off
excessive inventory.
a.
profit maximization
b.
profit-oriented pricing
c.
status quo pricing
d.
sales maximization
e.
market share pricing
24. If a company’s pricing objective is to meet the competition or to maintain existing prices, it is using
_____ pricing.
a.
head-on
b.
target return on investment
c.
status quo
d.
market share
e.
demand-oriented
25. When the local Shell station raises or lowers its prices on its gasoline, the Marathon station across the
street makes the same changes in its pricing. This is an example of _____ pricing.
a.
status quo
b.
target return
c.
market share
d.
predatory
e.
cost-plus
26. Which of the following statements describes an advantage of status quo pricing?
a.
Status quo pricing is derived from actual costs of manufacturing.
b.
Status quo pricing maintains the organization’s differential advantage.
c.
Status quo pricing is active, not reactive.
d.
Status quo pricing causes price wars.
e.
Status quo pricing requires little planning.
27. Although many factors can influence price, the primary determinants are:
a.
costs of manufacturing and distribution
b.
the demand for the good and the cost to the seller
c.
demand by the consumer and perceived quality
d.
distribution and promotion strategies
e.
stage of the product life cycle and costs to the consumer
28. The quantity of a product that will be sold at various prices for a specified period is called:
a.
market share
b.
demand
c.
supply
d.
value
e.
revenue
29. The price of the good or service is a key decision for a marketer because it most significantly and
directly affects the product’s:
a.
distribution
b.
costs
c.
demand
d.
promotion
e.
quality
30. Most demand curves slope:
a.
horizontally
b.
upward and to the right
c.
downward and to the left
d.
vertically
e.
downward and to the right
31. Peggy’s Twist Shack sells soft-serve ice cream. Peggy graphed the demand per week for vanilla ice
cream cones. The graph indicates a demand schedule that slopes downward and to the right. This
graph indicates that the quantity of vanilla ice cream cones demanded increases as:
a.
cost increases
b.
supply decreases
c.
price increases
d.
price decreases
e.
supply increases
32. The _____ is the quantity of a product that will be sold in the market at various prices for a specified
time period, and _____ is the quantity of a product that will be offered to the market by suppliers at
various prices for a specified period.
a.
demand; equity
b.
demand; supply
c.
supply; demand
d.
inventory; demand
e.
inventory; supply
33. _____ is the quantity of a product that will be offered to the market at various prices for a specified
period.
a.
Distribution
b.
Supply
c.
Price
d.
Equilibrium
e.
Elasticity
34. When the price of a product is set at a level where demand and supply are the same, _____ has been
achieved.
a.
equilibrium
b.
stability
c.
leverage
d.
symmetry
e.
status quo
35. At a price of $6,000, only 191 of the Moulton 60 model bicycle are being made. If Moulton sells each
one of the bicycles at that price, then a state of _____ has been achieved.
a.
symmetry
b.
marketing balance
c.
unitary economics
d.
commerce stability
e.
price equilibrium
36. Bottles of Pure Hawaiian Air contain air that smells like the floral bouquet that greets tourists as they
get off the plane in Hawaii. When a tourist shop began selling Pure Hawaiian Air, it charged $5 per
bottle and could not keep up with the demand. It has since raised the price to $7. Now the shop is still
selling all the bottles of Pure Hawaiian Air it carries, but the owner is not forced to reorder on a daily
basis. The $7 price is probably a(n):
a.
supply schedule
b.
symmetrical price
c.
price equilibrium
d.
inventory equalizer
e.
inelastic price
37. Consumers’ responsiveness or sensitivity to changes in prices is known as:
a.
break-even
b.
equilibrium
c.
unitary revenue
d.
asymmetrical demand
e.
elasticity of demand
38. When consumers are sensitive to price changes, _____ occurs.
a.
inelastic demand
b.
elastic supply
c.
elastic demand
d.
inelastic supply
e.
unitary elasticity
39. While the sales of the Apple iPhone have been great from the beginning, when Apple released its
iPhone 3G and cut the price of the iPhone for $399 to $199, sales exploded. One million iPhones sold
the first weekend. Demand for the iPhone appears to be:
a.
unitary
b.
predictable
c.
synergistic
d.
inelastic
e.
elastic
40. _____ occurs when an increase in sales exactly offsets a decrease in price so that total revenue remains
exactly the same.
a.
Inelastic demand
b.
Functional elasticity of demand
c.
Unitary elasticity
d.
Highly elastic demand
e.
Fixed elasticity
41. Demand for which of the following products or services is most likely inelastic?
a.
fishing boats
b.
milk
c.
pedicures
d.
filet mignon steak
e.
digital cameras
42. What happens when demand is elastic?
a.
As price goes up, revenue goes down.
b.
As price goes down, revenue goes down.
c.
As price goes up, revenue goes up.
d.
As price goes up, revenue does not change.
e.
As price goes down, revenue does not change.
43. If price _____ and revenue _____, demand is elastic.
a.
goes up; goes down
b.
goes down; goes down
c.
goes down; goes up
d.
down; stays the same
e.
up; stays the same
44. When price decreases and total revenue falls, demand is:
a.
elastic
b.
inelastic
c.
absolute
d.
unitary
e.
stable
45. When the NES Group lowered the price of its professional-grade meat slicers from $2,300 to $1,600,
demand doubled from 4 units sold per month to 8 units per month. However, total revenue dropped.
This is an example of:
a.
substitute goods
b.
unitary elasticity
c.
elastic demand
d.
consumer shortage
e.
inelastic demand
46. When Nesco brand food hydrators sold for $59.99, Nesco sold 90 dehydrators. When the company
dropped the price of its dehydrators to $44.95, it sold 145 dehydrators. Demand for the food
dehydrators appears to be:
a.
elastic
b.
inelastic
c.
unitary
d.
symmetrical
e.
asymmetrical
47. All of the following factors directly affect the elasticity of demand EXCEPT:
a.
other uses of a product
b.
inputs needed to manufacture the product
c.
availability of substitute goods
d.
price relative to a consumer’s purchasing power
e.
product durability
48. Which of the following would imply demand would be elastic?
a.
Price is low relative to purchasing power
b.
Nondurable product
c.
Low inflation rate
d.
Many substitute products
e.
All of these choices
49. The greater the number of different uses for a product, the more _____ demand tends to be.
a.
elastic
b.
inelastic
c.
unitary
d.
volatile
e.
stable
50. If a product has high pricing power this would indicate a situation of:
a.
unitary demand
b.
inelastic demand
c.
elastic demand
d.
constant demand
e.
revenue maximization
51. One way a firm can gain pricing power is to:
a.
produce something radically new and better than the competition
b.
lower prices at least 5% below the nearest competitor
c.
eliminate all poor producing products from manufacture and heavily promote the products
that are left
d.
join forces with a competitor to corner the market on a product
e.
All of these strategies will help a firm gain pricing power.
52. Pricing power is all about:
a.
profit maximization
b.
eliminating price wars between competitors
c.
perceived value to the customer
d.
long-term maximization of cash
e.
eliminating the competition
53. Yield management systems are used to:
a.
determine the availability of product substitutes in complex industries that are
experiencing rapid change
b.
profitably fill unused capacity
c.
predict necessary service levels to achieve revenue goals
d.
determine whether it is financially more feasible to buy a new product or repair a broken
one
e.
create elastic demand for low-involvement products
54. _____ use complex mathematical software to profitably fill unused capacity.
a.
Yield management systems
b.
Capacity correlation systems
c.
Service forecasting tools
d.
Service management systems
e.
Capacity management software
55. Allstate has more than 1,500 price-levels that are determined by a complex algorithms that analyzes 16
credit report variables, including late payments and card balances. Allstate is using a _____ to set
prices.
a.
yield management system
b.
capacity correlation system
c.
service forecasting tools
d.
service management system
e.
capacity maintenance tool
56. Which of the following statements about yield management systems (YMS) is true?
a.
The first use of YMS was in the U.S. car industry as it looked for ways to compete with
imports.
b.
YMS eliminate the problem of simultaneous production and consumption from services.
c.
YMS cannot be used by any other businesses but services.
d.
YMS are complex pricing systems used to set equilibrium pricing points.
e.
YMS are mathematically complex systems to make use of underutilized capacity and
reduce the cost of perishability.
57. Chad has calculated the sales volume at which his lemonade stand’s costs equal revenue. Over dinner
he announced to his family that he only needed to sell 50 glasses of lemonade at $5 per glass to cover
all his costs (lumber and nails for the stand, lemons, sugar, etc.). Which important factor has Chad
excluded from his analysis?
a.
fixed and variable cost determination
b.
consumer demand
c.
target return pricing
d.
break-even analysis
e.
market share