BA360: Chapter 14

Timor rents rooms in his hotel for an average of $100 per night. The variable cost per rented room is $20. His fixed costs are $100,000 and his target profit is $20,000. For Timor, to earn his target profit, he will need to rent out ________ rooms.

1,500 rooms

What are the five C's of pricing?

1. Company Objectives 2. Customers 3. Costs 4. Competition 5. Channel Members

In one year, the Sunrise Hotel incurred $100,000 in fixed costs. Because the hotel booked 10,000 room nights, its total variable cost is $100,000 (10,000 room nights × $10 per room). Thus, its total cost is

200,000

Kyle estimates that the fixed costs associated with opening a new bank branch are $500,000. He expects the branch to attract 1,000 new customer accounts in the first year, each of which will cost $50 per year to service. He also expects to generate $100,000 per year in revenue. For Kyle, the total cost of opening the new branch and remaining open for one year will be

550,000

________ products are products whose demands are positively related and as such, they rise or fall together.

Complementary

Brands that have developed loyal customers have a higher price elasticity of demand.

False

The demand curve for prestige products generally slopes downward due to higher prices.

False

Costs related to supply and costs related to demand are the two primary cost categories.

False;; its variable and fixed

American Airlines just reduced its fares for summer flights by $100. Delta Airlines changes its pricing structure and reduces its flights by $100 as well. Delta is employing status-quo pricing.

True

Because consumers are generally more sensitive to price increases than to price decreases, it is easier to lose current customers with a price increase than it is to gain new customers with a price decrease.

True

In U.S. markets, there are many substitute products for Lucky Charms cereal, suggesting the price elasticity of demand for Fruit Loops is high.

True

The key to successful pricing is to match the product with the consumer's perception of value.

True

Assume the demand for electricity, a necessity with few substitutes, is −0.2. If the electric company raised its rates by 10 percent, we would expect

a 2 percent decrease in quantity demanded.

Star Heating and Air Conditioning Company specializes in electric heat pumps. Francis keeps track of the price of natural gas, knowing that

an increase in the price of natural gas will increase demand for his electrical heating systems.

Variable costs change with

changes in the quantity being produced.

Dana owns a bakery where she sells cupcakes. Two blocks down there is another bakery, Sweet's Bakery, that sells cupcakes for $1 less than Dana. Dana decides to lower her price and match Sweet's Bakery prices. What type of pricing strategy is Dana implementing?

competitor-oriented pricing

Imelda's is an upscale women's clothing store. Prices are based on customers' beliefs about the value of the clothing. The store focuses on a limited target market and provides excellent customer service. Imelda's is using a ________ pricing strategy.

customer-oriented

Traditional demand curve economic theory is used by marketers to understand ________ in the five Cs of pricing.

customersCorrect

Managers of Wendy's fast-food restaurants keep track of prices at competitors such as McDonald's, Burger King, and Arby's, knowing that a decrease in the prices at these other fast-food restaurants will

decrease demand for Wendy's products.

If the price for a product increases, the demand for the complementary product will

decrease.

Marketers spend millions of dollars annually trying to create or reinforce brand loyalty. Brand loyalty changes the demand curve for the firm's products by

decreasing the price elasticity of demand.

The break-even point is estimated by

dividing fixed costs by contribution per unit.

Break-even analysis is useful because it allows managers to

estimate the quantity they will need to sell at a given price to break even.

A demand curve is built on the assumption that

everything but price and demand remains the same.

When a firm has a particular profit goal as its overriding concern, it will use target return pricing to meet the profit objective.

false

Which of the following is the most logical example of complementary products?

hot dogs and hot dog buns

Ike manages a Shoney's restaurant. He is considering staying open later in the evening. For Ike, the variable costs associated with staying open longer hours will include

hours worked by cooks.

A strategy of setting prices based on how customers develop their perceptions of value can often be the most effective pricing strategy, especially if the strategy

is supported by consistent advertising and distribution strategies.

The observation that consumers are generally more sensitive to price increases than to price decreases suggests that

it is easier to lose customers with a price increase than to gain customers with a price decrease.

A ________ strategy involves accurately measuring all the factors needed to predict sales and profits at various price levels, so that the price level that produces the highest return can be chosen.

maximizing profits

Cross-price elasticity is the

percentage change in quantity demanded of Product A compared to the percentage change in price of Product B.

Rita knew that her established customers liked her product much better than her competitor's. She was planning to expand into new markets, and she was considering pricing. She was leaning toward charging a higher price than competitors to help demonstrate that hers was a high-quality product. Rita was considering

premium pricing.

There is an old saying "If you have to ask the price of a yacht, you cannot afford it." Products like yachts are most likely to be associated with

prestige pricing.

If a 1 percent decrease in price results in less than a 1 percent increase in the quantity demanded, demand is

price inelastic.

What price competitive level would be indicated when the price is usually set according to the laws of supply and demand?

pure competition

Historically, prices were

rarely changed except in response to radical shifts in market conditions.

Ozzie is the marketing manager for an automobile dealership. His boss tells him the firm's primary goal is to increase its local market share from 15 to 30 percent. His firm is using a ________ orientation.

sales

Firms using a ________ to set prices believe that increasing sales will help the firm more than will increasing profits.

sales orientation

Health clubs often use a low introductory offer price to get people to join their club. These low prices represent a ________ pricing strategy.

sales orientation

Many years ago Honda's Accord and Ford's Taurus were the two top-selling cars in the United States. As the year was coming to an end, Ford cut the price of the Taurus, hoping to outsell the Accord and allow Ford to claim that "Taurus is the best-selling car in America." Ford was using a ________ pricing strategy.

sales orientation

Abdul's firm has set corporate direction to become one of the leaders in each of its significant market segments. It was Abdul's job to examine the firm's pricing strategy to determine how to maximize market share, even at the expense of profits in the short run. What kind of company objective would guide Abdul's effort?

sales-oriented

Naomi tells her sales representatives the goal is to generate at least a 15 percent return on investment for all of the industrial building supplies they sell. Naomi is using a ________ pricing strategy.

target return

Wilhelm owns Do-It-Right Auto Repair Service. He has observed over the years that customers keep their high-mileage cars longer when the economy is doing poorly, creating demand for his maintenance and repair service. Wilhelm has observed the impact of ________ on demand for his service.

the income effect

Because there are many firms in monopolistic competition markets

the many competitors will focus on product differentiation.

The more substitutes that exist in a market,

the more sensitive consumers will be to changes in the price of a particular product.

There are many options available to consumers when it comes to breakfast cereals. So, if Kellogg's significantly increases the price of Rice Krispies, consumers are more apt to buy alternate cereals instead. This illustrates which concept?

the substitution effect

One problem in relying on price elasticity and demand curves when setting prices is

the way a product or service is marketed can have a profound impact on price elasticity.

________ is the cash expenditure plus taxes that consumers have to pay for a good or service.

Price

Which of the following is most likely to be characterized by pure competition in the United States?

Soybeans

Pricing strategies should be aligned with a firm's overall goals and objectives.

True

Rarely is the lowest-price product offering the dominant brand in a given market.

True

Customers must see value in a product or service before they are willing to exchange time or money to obtain it, but not all customers see the same value in a product. To analyze how many units will be sold at any given price point, marketers draw on

a demand curve.

For which of the following is demand likely to be most sensitive to price increases?

a specific brand of soft drink

Hayla is the marketing manager for a fast-food restaurant chain. She uses a target return pricing strategy because her firm's primary objective is to

increase profits.

Samar customizes Harley-Davidson motorcycles. No two cycles are alike. He notices that very few customers even ask the price of his motorcycles before they decide to purchase them. Demand for his motorcycles is probably

price inelastic.