Chapter 14 Practice Quizzes: BA 370

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. -Total costs = Fixed costs + Variable costs, or $500,000 + (1,000 × $50) = $550,000. Revenues are not a factor when calculating total costs.

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. Price elasticity = % change in demand ÷ % change in price. In this case, −0.2 = % change in demand ÷ 10. The answer is −2, or a 2% decrease in demand.

T/F: Brands that have developed loyal customers have a higher price elasticity of demand.

-False Brands with loyal customers have lower price elasticity of demand; in other words, demand will decrease more slowly as price goes up.

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 greater the availability of substitute products, the higher the price elasticity of demand for any given product will be.

______ shows the relationship between income and demand.

A demand curve

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

Customers

What situation is occurring if a 1 percent decrease in price results in more than a 1 percent increase in quantity demand?

Demand is price elastic.

T/F: Costs related to supply and costs related to demand are the two primary cost categories.

FALSE. here are two primary cost categories: variable and fixed.

T/F: Brands that have developed loyal customers have a higher price elasticity of demand.

False

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

False

The price elasticity of demand for a specific brand of deodorant is −0.9. The market for this product is considered

INELASTIC. The market for a product is generally viewed as price insensitive, or inelastic, when its price elasticity is greater than 1.

________ is the cash expenditure plus taxes that consumers have to pay for a good or service. A warranty A trade Competitive value Price Consumer perception

Price

Annika operates on a pretty tight budget. She is a price-conscious shopper and usually buys store or generic brands to save money. Recently, however, Annika was given a pretty substantial raise. As such, she has altered her shopping patterns and now regularly buys more expensive, name-brand goods. This is an example of

The income effect.

T/F: 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

T/F: Price is the only part of the marketing mix that does not generate costs.

True

T/F: Pricing strategies should be aligned with a firm's overall goals and objectives. Group starts

True

T/F: When the price of milk goes up, demand does not fall significantly, because people still need to buy milk. However, if the price of T-bone steaks rises beyond a certain point, people will buy fewer of them because they can turn to the many substitutes for this cut of meat. This refers to price elasticity of demand.

True

T/F: Price is the only part of the marketing mix that does not generate costs.

True. Product, place, and promotion all generate costs; price generates revenue.

T/F: 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: Consumers show more sensitivity to price increases than to price decreases.

T/F: The key to successful pricing is to match the product with the consumer's perception of value.

True: Successful pricing considers consumers' perceived value, since to ignore this might result in a price that is too high or too low.

When CarMax promises a "no-haggle" pricing structure, it exhibits ________ because it provides additional value to potential used car buyers by making the process simple and easy.

a customer orientation

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. -Demand curves evaluate how price changes affect consumers' purchase decisions, and in effect they measure consumers' different value perceptions.

For which of the following is demand likely to be most sensitive to price increases? prescription drugs college tuition for last-semester seniors electricity hospital care a specific brand of soft drink

a specific brand of soft drink

Variable costs change with

changes in the quantity being produced. -Variable costs are costs that change as the production quantity changes.

When Ursula decides how to price new products in her gift store, she measures the value of her product offerings against those of the other stores in her area. Ursula uses a ________ pricing strategy.

competitor-oriented

In general, prices should not be based on costs because

consumers make their purchase decisions based on perceived value.

In general, prices should not be based on costs because...

consumers make their purchase decisions based on perceived value.

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. -Complementary products are things that are used together; if the price of one product increases, the demand for the complementary product will decrease because the total cost of using the two products together has increased.

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. -Contribution per unit, which is the price less the variable cost per unit. Break-even point calculates the number of units' contribution needed to cover fixed costs.

When it comes to measuring consumers' price sensitivity, product prices are viewed as either elastic or inelastic. fixed or variable. complementary or substitutable. necessary or optional. dynamic or rigid.

elastic or inelastic.

A demand curve is built on the assumption that

everything but price and demand remains the same.

A demand curve is built on the assumption that

everything but price and demand remains the same. -Demand curves evaluate how changes in price effect demand for the product.

Which of the following is the most logical example of complementary products? hot dogs and hamburgers VCRs and DVD players hot dogs and hot dog bunsCorrect Honda cars and Toyota cars

hot dogs and hot dog buns

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

If a firm is engaged in ________ competition, it should seek a way to differentiate itself.

monopolistic Monopolistic competition occurs when there are many firms competing for customers in a given market, but their products are differentiated.

If a firm in a purely competitive market can differentiate its product or service, it becomes part of a(n) ________ market.

monopolistic competition

In a market with ________ there are many firms providing differentiated products.

monopolistic competition

The commercial airline industry is considered what type of market? duopoly monopoly monopolistic competition pure competition oligopolistic competition

oligopolistic competition -When a market is characterized by oligopolistic competition, only a few firms dominate. Examples of oligopolistic markets include the soft drink market and commercial airline travel.

Cross-price elasticity is the

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

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: he center of attention in almost all marketing strategies analyzed and changed constantly. calculated to minimize contribution per unit. allowed to vary seasonally as cross-shopping tendencies fluctuated. rarely changed except in response to radical shifts in market conditions.

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

Juliannna wants her firm's gourmet snacks to be the leading brand in the U.S. market. When adopting a pricing strategy designed to gain market share, she should remember that

rarely is the lowest-price offering the dominant brand in a market.

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. maximizing profits target profit target return status-quo sales orientation

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 -Abdul is interested in sales, not profits, which is a sales-oriented strategy.

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

soybeans. -With pure competition, a large number of sellers offer standardized products or commodities that consumers perceive as substitutable, such as grains, gold, meat, spices, or minerals.

Byron gave the manager of his convenience store a set of binoculars so she could see the gasoline prices charged by the other convenience store at that intersection. Byron told the manager to always match the gasoline prices of the other store. Byron is using a ________ pricing strategy.

status-quo

When Delta increases its average fares, American Airlines and United often follow with similar increases. This is an example of

status-quo pricing. -A competitor-oriented strategy, status-quo pricing, changes prices only to meet those of the competition.

Sales of national brands of orange juice tend to increase when the economy is doing well, while sales of generic orange juice increase when the economy is not doing well. This is an example of how ________ impacts demand for products.

the income effect

Raoul was known for driving 20 miles just to save a dollar on the price of his favorite beverage. Raoul perceived price as ________ for a good or service, while most consumers recognize price as the ________ made to acquire a good or service.

the money paid; overall sacrifice

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.

If the fixed costs of manufacturing a new cell phone are $10,000, the sales price is $60, and variable cost per unit is $20, the break-even point is

250 units. -Contribution per unit is $60 − $20 = $40. Then we divide the fixed costs by the contribution per unit. $10,000 ÷ $40 = 250 units.

Samson rents rooms in his hotel for an average of $100 per night. The variable cost per rented room is $20, to cover maid service and utilities. His fixed costs are $100,000 and his profit last year was $20,000. For Samson, the contribution per unit is $100. $80. $800. $1,000. It cannot be determined from the information provided.

$80. -Contribution per unit = Price Variable cost per unit = $100 − $20 = $80. His fixed costs and profit are not needed for this calculation.

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. 100 1,500 20,000 1,000 It cannot be determined from the information provided.

1,500 Sales volume = (Fixed costs + Target profit) ÷ Contribution per unit = ($100,000 + $20,000) ÷ ($100 − $20) = $120,000 ÷ $80 = 1,500.

T/F: The demand curve for prestige products generally slopes downward due to higher prices.

False.

T/F: At the break-even point, profits are maximized.

False. Profits are zero.

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

False. Target return pricing is used when firms want to produce a specific return on their investment

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

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.

Predatory pricing

is illegal in the United States under both the Sherman Antitrust Act and the Federal Trade Commission Act.

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.

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 a top of market strategy. the value of quality. advantageous pricing. premium pricing. differential pricing.

premium pricing.

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 -Since Samar's customers don't seem to care about the price (price insensitive), we would not expect to see demand change much as price changes. This describes a situation where demand is price inelastic.

Which of the following markets is most likely to be characterized by oligopolistic competition in the United States? soybeans pens and pencils smartphone service providers men's clothing electrical service to the home

smartphone service providers

Consider a bakery like Entenmann's: The majority of the ________ costs are the cost of the ingredients, primarily flour.

variable -Variable costs are those costs, primarily labor and materials, that vary with production volume.

In developing marketing strategies, why is price often the most challenging of the four Ps to manage?

because it is the least understood element of the marketing mix

Dynamic pricing is also referred to as ________ pricing.

individualized. -The process of charging different prices for goods or services based on the type of customer, level of demand, or time of the day or week or even season is referred to as dynamic pricing or individualized pricing.

One of the limitations associated with break-even analysis is that it assumes fixed costs are zero. it cannot adjust for high variable costs. it tells marketers only what price is needed to break even. it assumes that there is only one price. it assumes that demand is extremely inelastic.

it assumes that there is only one price.

The observation that consumers are generally more sensitive to price increases than to price decreases suggests that -most consumers cannot remember what price they paid the last time they bought a particular product. -it is easier to lose customers with a price increase than to gain customers with a price decrease. -most consumers would rather skip buying a product than pay a higher price. -most consumers are emotionally attached to their favorite products and are unlikely to change, even if the price changes.Incorrect -firms gain more customers with price decreases than they lose with price increases.

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

Because there are many firms with similar products in purely competitive markets,

price is determined by the laws of supply and demand.

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

According to a typical demand curve, the higher the price,

the lower the quantity consumers will buy.

There is often only one provider of cable television services in each region of the country: Time Warner is in New York, Comcast is in most of New England, and so forth. When Comcast recently proposed a plan to buy Time Warner, the purchase ultimately could not be completed, mostly due to concerns that it would have caused Comcast to become an overly large ________ with too much power.

Monopolist

________ are included in the full price of a product or service.

Travel cost. -Taxes, shipping, travel costs, and the value of the consumer's time are all elements of the full price of a product.

The point at which the number of units sold generates enough revenue to equal the total costs of running an operation is known as the

break-even point.

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

Evan is a yacht broker in the southeastern United States. For years he has had difficulty selling large yachts locally because there were few places to dock these boats. Yachts and spaces to dock them are an example of substitute products. purely competitive products. status-quo pricing products. complementary products. competitive parity products.

complementary products.

For which of the following is demand likely to be least sensitive to price increases: spring break vacations a specific brand of cereal prescription drugs theater tickets restaurant meals

drugs

Because there are only a few firms in markets with oligopolistic competition,

price wars may occur.

Dante always buys and uses Bridgestone brand golf balls. If he finds a Titleist or Callaway ball in the rough, he gives it away. Brand-loyal golfers like Dante allow Bridgestone to charge a higher price and not lose many sales. By building a strong brand, Bridgestone has effectively

reduced the price elasticity of demand for its products

Unlike product, promotion, or place, price is the only part of the marketing mix that...

that generates revenue

Because there are many firms in monopolistic competition markets,

the many competitors will focus on product differentiation.