Chapter–by–chapter aids: Chapter 18
Instructor’s Manual to Accompany Essentials of Marketing IV–18–19
D-8. In the EI case, in which stage of the product life cycle do semiconductors appear to be?
A) Market maturity
B) Sales decline
C) Market introduction
D) Market growth
Answer: A
AACSB: Analytic
Level of Difficulty: 2 Medium
Learning Objective: 9.1
Blooms: Apply
Feedback: The market maturity stage occurs when industry sales level off and competition gets tougher.
Refer to Chapter 9.
E. Pump Systems, Inc.
Use this information to answer the following questions that refer to the Pump Systems, Inc. case.
Pump Systems, Inc. (PSI) produces two major kinds of water pumps. The smaller pumps range in price
from $5–$30, and are used in drinking fountains and soft–drink machines. Most of these pumps are bought
PSI sells nationally through sales reps located in large industrial centers. These reps handle the selling
function for PSI in their geographic areas and provide market information. They usually do the same thing
for 10 to 20 similar manufacturers of noncompeting products—and are paid on a commission basis.
There are no other producers of the smaller pumps in the United States—because PSI has patent
protection. As a result, management has decided to follow a policy of pricing high – to maximize profits –
while the patent lasts.
Several competitors are in the market for the larger pumps. Industry prices and profits of these pumps
have dropped in the past few years because of firms trying to increase their market shares. The product
design has remained fairly stable over the last few years – and one firm dropped out as it saw that it would
lose more money with its “me–too” product. Industry sales are increasing – but at a very slow rate. The
price of these products is determined by adding a standard markup percentage to the variable cost of the
items – to cover fixed costs and profit. For instance, pump Z has variable costs of $250 per unit, and a
factory.
E-1. What kind of products are PSI’s small pumps to most customers?
A) Supplies
B) Component parts
C) Raw materials
D) Accessory equipment
E) Installations
Answer: B
AACSB: Analytic
Level of Difficulty: 2 Medium
Learning Objective: 8.7
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Part IV
IV–18–20 Perreault, Cannon, & McCarthy
Blooms: Apply
Feedback: Component parts are finished (or nearly finished) items that are ready for assembly into the
final product. Refer to Chapter 8.
E-2. In the PSI case, what kind of products are the small pumps for customers who use them to replace
worn pumps in their own machines?
A) Component parts
B) Raw materials
C) Accessory equipment
D) Installations
E) Supplies
Answer: E
AACSB: Analytic
Level of Difficulty: 2 Medium
Learning Objective: 8.7
Blooms: Apply
Feedback: Supplies are expense items that do not become part of a finished product. Supplies can be
divided into three types: (1) maintenance, (2) repair, and (3) operating supplies. Refer to Chapter 8.
E-3. PSI’s sales reps are:
A) selling agents.
B) company salespeople.
C) full–line merchant wholesalers.
D) rack jobbers.
E) manufacturers’ agents.
Answer: E
AACSB: Analytic
Level of Difficulty: 2 Medium
Learning Objective: 12.7
Blooms: Apply
Feedback: A manufacturers’ agent sells similar products for several noncompeting producers—for a
commission on what is actually sold. Refer to Chapter 12.
E-4. What pricing policy does PSI use for its small pumps?
A) Skimming pricing
B) Price lining
C) Target return pricing
D) Prestige pricing
E) Penetration pricing
Answer: A
AACSB: Reflective Thinking
Level of Difficulty: 2 Medium
Learning Objective: 16.3
Blooms: Apply
Feedback: A skimming price policy tries to sell the top (skim the cream) of a market, the top of the
demand curve, at a high price before aiming at more price–sensitive customers. Refer to Chapter 16.
E-5. What stage in the product life cycle do PSI’s large pumps seem to be in?
A) Market maturity
B) Sales decline
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Chapter–by–chapter aids: Chapter 18
Instructor’s Manual to Accompany Essentials of Marketing IV–18–21
C) Market introduction
D) Market growth
Answer: A
AACSB: Analytic
Level of Difficulty: 2 Medium
Learning Objective: 9.1
Blooms: Apply
Feedback: The market maturity stage occurs when industry sales level off and competition gets tougher.
Refer to Chapter 9.
E-6. What is the contribution to fixed cost and profit of PSI’s pump Z?
A) $100 per unit
B) $75 per unit
C) $50 per unit
D) $25,000
E) Cannot be determined unless you know the sales volume.
Answer: A
AACSB: Analytic
Level of Difficulty: 2 Medium
Learning Objective: 17.4
Blooms: Apply
Feedback: Total fixed cost is the sum of those costs that are fixed in total—no matter how much is
produced. Among these fixed costs are rent, depreciation, managers’ salaries, property taxes, and
insurance. Such costs stay the same. Fixed cost (FC) contribution per unit is the assumed selling price
E-7. In the PSI case, what is the break–even point for pump Z IN DOLLARS?
A) $200,000
B) $100,000
C) $2,000,000
D) $700,000
E) $500,000
Answer: D
AACSB: Analytic
Level of Difficulty: 2 Medium
Learning Objective: 17.4
Blooms: Apply
Feedback: Break–even point (BEP) is the quantity where the firm’s total cost will just equal its total
revenue. To figure the BEP (in units), divide the total fixed cost (TFC) by the fixed cost (FC) contribution
E-8. What kind of promotion is PSI using when it publishes catalogs and exhibits in trade shows?
A) Advertising
B) Publicity
C) Sales promotion
D) Personal selling
Answer: C
AACSB: Analytic
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Part IV
IV–18–22 Perreault, Cannon, & McCarthy
Level of Difficulty: 2 Medium
Learning Objective: 15.9
Blooms: Apply
Feedback: Sales promotion refers to those promotion activities—other than advertising, publicity, and
personal selling, that stimulate interest, trial, or purchase by final customers or others in the channel.
Refer to Chapter 15.
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Chapter–by–chapter aids: Appendix A
Instructor’s Manual to Accompany Basic Marketing IV-A-1
APPENDIX A: ECONOMICS FUNDAMENTALS
APPENDIX A – COMMENTS ON QUESTIONS AND PROBLEMS
A- 1. The key here is that economists see individuals choosing among alternatives and if the price of
one of the many commodities customers can buy is raised, then economists would expect
A- 2. It is a “picture” of a demand schedule. This is downsloping for the reasons explained in
Question 1..
Some prestige or status–oriented products – like jewelry or French perfume – might not have a
down sloping demand curve. For these products, part of what makes them “desirable” is the
fact that they are special. If prices were too low, customers might look for something else to
A- 3. See chapter–opening section, “Products and Markets as Seen by Customers and Potential
Customers.” ” We often talk about the annual demand for automobiles or wheat, but short–run
demand curves might be relevant also – especially for operational decisions. In the automobile
market, for example, it might be useful to think of relatively inelastic demand curves early in the
model year, when those who are anxious to have the “newest” are evident in the market. Then,
later in the year, “end–of–the–year bargain hunters” might offer more elastic demand curves. In
A- 4. To the extent that men have substitutes for dress shoes, the dress shoe market would be more
elastic than the general shoe market. However, if they have entirely different attitudes when
buying dress shoes, perhaps being more interested in style, color, etc.; then their demands for
particular kinds of shoes might be more inelastic because they do not see that all of the
different shoes are substitutes. The same ideas would apply to women’s shoes. Demand might
be quite inelastic, within reasonable price brackets anyway, if some manufacturers offered a
distinctly different design or color. This is one reason that so much time and effort is spent
A- 5. If the perfume industry as a whole could agree to raise prices, then inelastic demand would
indicate that total revenue would increase and therefore the move would seem desirable.
However, an individual producer would have to be sure that his or her own demand curve is
inelastic above the present price before making the move. In determining the most profitable
price, one must usually take into consideration supply curves. Marginal concepts for price
determination are introduced in Chapter 17.
A- 6. Even though the demand for shrimp is highly elastic, indicating the total revenue would
increase at a lower price, the producer must also consider that his costs also increase when
A- 7. Inelastic demand and supply are caused by different factors and therefore there is no reason
why they should be found together in the same situation. Customers’ attitudes and the
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Part IV
IV-A-2 Perreault, Cannon, & McCarthy
availability of substitutes are involved with respect to demand, while elasticity of supply is
related to the suppliers’ cost structures and profit objectives.
A- 8. This question relates to the discussion of substitutes in the opening section, “Products and
Markets as Seen by Customers and Potential Customers.” ” The text highlights the fact that
elasticity of demand for a product might depend on the availability of substitutes – products
that offer the buyer a choice. A marketing manager would usually prefer to offer a product that
does not have close substitutes because it would mean that there would be less competition
for the business of customers. Of course, the lack of close substitutes does not guarantee a
profit. A company might develop a product that does not satisfy consumer needs – or which
buying dress shoes made of real leather. Thus, a product that does not satisfy customers‘
needs is unlikely to be successful – regardless of the fact that it is “all alone” in the market.
Even a product that potentially meets needs may be unprofitable in a market where there is no
close substitute. For example, a really new product concept might meet needs that potential
customers have, but if they don’t know about the product, or don’t know where to get it, or if it
is not available when they want it, the whole effort may fail. A lack of close substitutes is not a
A- 9. The market’s dimensions become important here. There may be little competition. Similar
prices might result from using the same cost–plus pricing procedures. It could be argued that
many small food retailers are outstanding examples of monopolists. They have a following of
consumers who, for the most part, do no shopping elsewhere and have little knowledge of
prices and selection in other stores. Further, these consumers might have no interest or desire
to search out alternate sources of supply. Thus, the conditions for pure competition are not
(1) Large number of buyers and sellers offering to buy and sell under exactly the same
conditions.
(2) Perfect knowledge about the demand and supply conditions for identical products.
(3) Ease of market entry and exit.
(4) Completely economic behavior, i.e., decisions motivated only by price considerations,
not psychological factors. (This was not mentioned explicitly in the text, but it is assumed
A- 10. Pure competition examples are not easy to come by. Even the (commodity) grain products sold
in central markets like Minneapolis and Kansas City can be thought of as different “products.” ”
But the conditions of pure competition come closest to being met in such large centralized
public markets.
Any kinds of products could be listed for the monopolistic competition examples.
It should be expected that the marketing mixes for some of these products will be similar, as
their characteristics and their market situations are similar. This question encourages the
students to begin to categorize products, anticipating the material in Chapter 8 and the
subsequent material on Place and Promotion that is related to these product classes. Using
the blackboard to list and organize the students’ suggestions, this question can be used – like
cases – to draw out principles and generalizations.
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Chapter–by–chapter aids: Appendix A
Instructor’s Manual to Accompany Essentials of Marketing IV-A-3
A- 11. This question is challenging because, theoretically, the products, but more broadly the
marketing mixes, of the competitors should be seen as identical. In this situation, we then
would expect to find a kinked demand curve situation facing each competitor. In the real world,
most firms attempt to differentiate their offering somewhat, and so it is much easier to find
examples of monopolistic competition. But where competing executives really do not have
confidence that they have successfully differentiated their offering, they may tend to treat
raising prices – perhaps based on an “equitable” passing along of cost increases.
DISCUSSION OF COMPUTER-AIDED PROBLEM FOR USE WITH APPENDIX A
There is not a Computer-Aided Problem specifically for this appendix. However, Computer–Aided Problem
3 (see the discussion in the notes for Chapter 3) works well with the discussion of competition in this
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Part IV
IV-A-4 Perreault, Cannon, & McCarthy
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