Chapter 19: Pricing Concepts

Sherman's is a family-owned furniture and appliance retailer with four locations in central Illinois. The business is family-owned and is now run by the son of the founder. Sherman's frequently uses television advertising and social media to promote the business and recently began offering a price match guarantee. The company is encouraging customers to check competitor prices while shopping at Sherman's and will even offer customers the use of an iPad to check deals. Sherman's will meet or beat any advertised competitor's price on similar merchandise. What type of practice is Sherman's implementing through its price-match guarantee? a. Price competition b. Integrated pricing c. Value-conscious pricing d. Nonprice competition

a. Price competition

Zara claims to offer high fashions at attractive prices. It has often engaged in collaborations with certain fashion designers. Zara is most likely to appeal to the _______ consumer. a. value conscious b. prestige sensitive c. price conscious d. discount sensitive e. budget conscious

a. value conscious

Which of the following statements is true about premium-priced products? a. They are often marketed through intensive distribution. b. They are often marketed through selective or exclusive distribution channels. c. They are less likely to require personal selling activities. d. Advertisements often include the product's price.

b. They are often marketed through selective or exclusive distribution channels.

Which of the following are types of pricing used in business markets? (Select three) a. Price leaders b. Transfer pricing c. Price discounting d. Comparison discounting e. Geographic pricing

b. Transfer pricing c. Price discounting e. Geographic pricing

Jacobsen's Department store featured advertisements that showed a man's suit on sale for $199.99—marked down from $250. However, it was found that the suit was never actually sold at the $250 price point. This is an example of _______. a. price fixing b. deceptive pricing c. predatory pricing d. price discrimination

b. deceptive pricing

You have been hired as a pricing analyst to assist a firm in setting their prices. The company wants to maximize its profits, and profit maximization is achieved when _______. a. total variable costs equal average revenue b. marginal costs equal marginal revenue c. marginal costs exceed marginal revenue d. average total costs equal marginal revenue

b. marginal costs equal marginal revenue

Scenario 19.1. Chantel, a resident of Denver, Colorado, decided to open up her own fine jewelry store. To do so, she used her life savings and a loan from the bank. Chantel was able to open up a store with sufficient inventory. She markets the jewelry as the "finest jewelry in the West." The most popular item Chantel sells is a rose gold bracelet that sells for $550. During one month, Chantel's fixed costs are $6,000. Her variable costs average about $400. Refer to Scenario 19.1. Chantel decided to raise the price of her rose gold bracelets even higher to $750. To her surprise, though, demand went down. Based on this information, the rose gold bracelets are most likely a(n) ____________ product. a. elastic b. prestige c. competitive d. fixed product

b. prestige

Factors that influence the assessment of value include ________, ________, and ________. (Select three). a. elasticity of demand b. price levels c. perceived quality d. time constraints

b. price levels c. perceived quality d. time constraints

Costs that change with the level of production, such as raw materials costs, are referred to as ______________. a. fixed costs b. variable costs c. marginal costs d. average fixed costs

b. variable costs

Which of the following statements is true regarding consumers' reliance on the price-quality relationship? a. Consumers are more likely to rely on the price-quality relationship when they are making purchases via the internet. b. Consumers are always willing to pay more for a product to have higher levels of product quality. c. Consumers are more likely to rely on the price-quality relationship when they cannot judge the quality of the product themselves. d. Consumers often associate higher prices with lower levels of product quality.

c. Consumers are more likely to rely on the price-quality relationship when they cannot judge the quality of the product themselves.

Which of the following shows the quantity of products a firm expects to sell at various prices if other factors remain constant? a. Breakeven point b. Demand line c. Demand curve d. Marginal analysis

c. Demand curve

Hermes is a high-end luxury brand. Which of the following statements about Hermes is most likely to be true? a. It is likely to encounter price wars in its industry. b. It is most likely to make use of trade discounts. c. It does not mention price on its advertisements. d. It remains inelastic no matter how high the price gets. e. It competes against its rivals using price competition.

c. It does not mention price on its advertisements.

Which one of the following types of products is not subject to inelastic demand? a. Status-symbol cars b. Gasoline c. Electricity d. Dining room furniture

d. Dining room furniture

If a firm sells a prestige product, what kind of relationship between price and quantity demanded should it expect? a. It should expect to sell more when it lowers the price. b. It should expect to sell more at ever-higher prices. c. It should expect to sell less at ever-higher prices. d. It should expect to sell more at higher prices, up to a point.

d. It should expect to sell more at higher prices, up to a point.

_______ occurs when a marketer utilizes distinctive product features, service, product quality, promotion, packaging, or other factors to differentiate its products or services from their competitors. a. Monopolistic competition b. Differential competition c. Price competition d. Nonprice competition

d. Nonprice competition

Which of the following statements about price as an element of the marketing mix is true? a. Price has limited effects on a firm's sales and profitability. b. The development of the price and pricing-related objectives involves a long-term commitment and, once set, is rarely changed. c. Developing the price for a product or service is a lengthy process and is very inflexible. d. The pricing element of the marketing mix is very flexible, and marketers can quickly respond to changes in demand or competitors' actions.

d. The pricing element of the marketing mix is very flexible, and marketers can quickly respond to changes in demand or competitors' actions.

Scenario 19.2. Hassim is the buyer of equipment for a large factory. Hassim wants to get the best deal possible. He does not mind paying extra, however, if it means getting equipment that will last a long time. Doug, a salesperson from an equipment firm that wants to sell to Hassim's company, has done his research. He knows that once Hassim purchases from a company, he is most likely to purchase from them in the future—especially if he views the equipment as good quality. To secure the deal Doug therefore takes 5 percent off the list price of the equipment his firm is selling to Hassim. Hassim accepts the deal. Refer to Scenario 19.2. How would you refer to Hassim? a. Price conscious b. Discount conscious c. Prestige sensitive d. Value conscious e. Elastic

d. Value conscious

Kimberly sees some jeans at Loft that are $100. She has bought blue jeans at Loft before but for not nearly as much. Kimberly looks at the jeans and cannot see much of a difference between these jeans and the ones she usually buys. Kimberly decides not to purchase the jeans. In this case, Kimberly made use of a(n) _______. a. marginal cost b. external reference price c. price discount d. allowance e. internal reference price

d. allowance

________________ is the oldest form of exchange. a. credit b. swapping c. money d. barter

d. barter

When marginal revenue equals marginal cost, profit is at its highest. True False

True

Which of the following slogans is most likely an example of price competition? a. "Just Do It." b. "Think Different." c. "Because I'm Worth It." d. "Find New Roads." e. "Shave Time. Shave Money."

e. "Shave Time. Shave Money."

Identify the effects of price elasticity on total revenue total revenue decreases with a decrease in price

inelastic demand

To calculate the breakeven point, a firm divides 1. ________ costs by per-unit contribution to 2. __________ costs. 1. a. fixed b. inelastic c. variable d. elastic 2. a. fixed b. inelastic c. variable d. elastic

1. a. fixed 2. a. fixed

1. ______________ is when consumer demand is insensitive to price changes, and 2. ________________ is when consumer demand is sensitive to price changes. 1. a. market share b. inelastic demand c. elastic demand d. inverse demand 2. a. total revenue b. market share c. inelastic demand d. elastic demand

1. b. inelastic demand 2. d. elastic demand

A business must decide whether it will use 1. _______________ competition only or 2. _______________ competition before setting a price for its product. 1. a. product quality b. nonpromotion c. price d. packaging 2. a. customer service b. nonprice c. demand d. low-cost

1. c. price 2. b. nonprice

Fred is angry. He claims his roommate, Edward, stole his idea for a new mobile app. Now Edward has successfully released the app to much fanfare. Fred is demanding that he be compensated for his idea and names what he believes to be a fair price. Edward argues that he is the one who spent the resources developing the app and marketing it. Edward claims that you cannot assess an idea using price as a factor because it is intangible and involved nothing more than having an insightful thought for a new app. Edward is correct in his assertion. True False

False

Gael thinks he has reached the point where he has maximized his profit. However, because this can be tricky to determine, he is not sure. He decides to test it by selling one more unit. If Gael is correct in his assumption, what should happen when he sells this additional unit? a. Marginal cost will exceed marginal revenue. b. Gael will break even on his sales. c. Profits will be reduced to zero. d. Profit will increase but at a slower rate. e. Marginal revenue will exceed marginal cost.

a. Marginal cost will exceed marginal revenue.

Which of the following companies is most likely to use nonprice competition rather than price competition? a. Recreational Equipment, Inc (REI) b. McDonald's c. Walmart d. Best Buy e. Amazon

a. Recreational Equipment, Inc (REI)

If an inverse relationship exists between a product's price and the quantity of the item demanded, the demand is described as _______. a. elastic b. unknown c. inelastic d. unitary

a. elastic

Sandy recently leased her first apartment and is purchasing accessories and décor. She enjoys shopping at HomeGoods and believes she is saving a lot of money since the store's sales tickets include information about "their price" and "our price." The information provided on the sales tag is called a(n) _______. a. external reference price b. value-conscious price c. internal reference price d. adaptive price

a. external reference price

A price developed in the buyer's mind through experience with the product is a(n) ________. a. internal reference price b. trade discount c. external reference price d. breakeven point

a. internal reference price

Louis Vuitton is a fashion brand often associated with elite or high-profile customers who can afford to spend $1,000 or more on a purse. One of its most popular handbags is the Alma, which is a structured bag and part of the Monogram collection. Louis Vuitton closely monitors its sales and wanted to test the elasticity of demand. It noticed that when the Alma bag was priced at $1,500, a greater number were sold compared to a retail price of $1,300. However, if the price was $1,750, sales of the bag declined. The pricing research conducted by Louis Vuitton demonstrates that the Alma bag is a _______ product. a. prestige b. standard c. convenience d. reverse-demand

a. prestige

Scenario 19.2. Hassim is the buyer of equipment for a large factory. Hassim wants to get the best deal possible. He does not mind paying extra, however, if it means getting equipment that will last a long time. Doug, a salesperson from an equipment firm that wants to sell to Hassim's company, has done his research. He knows that once Hassim purchases from a company, he is most likely to purchase from them in the future—especially if he views the equipment as good quality. To secure the deal Doug, therefore, takes 5 percent off the list price of the equipment his firm is selling to Hassim. Hassim accepts the deal. Refer to Scenario 19.2. Doug's company is offering Hassim's firm a(n) __________ discount. a. trade b. quantity c. seasonal d. allowance

a. trade

Identify the type of discount the price is reduced to achieve a desired goal

allowance

Scenario 19.4. Anthony has purchased a new shipment of 50 Bluetooth earbuds that he plans to sell for $99.99 each. The manufacturer informs Anthony that each product will cost Anthony $52, but this does not include the cost of transportation. Even with the extra transportation costs, Anthony is not worried. He believes he can sell all 50 earbuds by the end of the month. After adding up inventory, transportation, storage, and other costs, he determines that his total costs will be $3,750. Refer to Scenario 19.4. Anthony thinks that he can sell all 50 Bluetooth earbuds for $99.99 each. His total costs are estimated to be $3,750. However, by the end of the month Anthony has only sold 33 earbuds. What is his profit? a. -$1,249.50 b. -$450.33 c. $1,249.50 d. $133.53 e. $450.44

b. -$450.33

Which of the following firms would be most likely to use nonprice competition rather than price competition? a. Allstate b. BMW c. Uber d. KFC e. Albertson's

b. BMW

Which of the following is not a factor that affects pricing decisions? a. Channel member expectations b. Discounts c. Legal and regulatory issues d. Competition

b. Discounts

What happens when the firm achieves the breakeven point? a. It will increase costs on each unit sold after that point. b. It will make money on each unit sold after that point. c. It will meet demand on each unit sold after that point. d. It will lose money on each unit sold after that point.

b. It will make money on each unit sold after that point.

In conducting an assessment of her accounting firm, Paige discovers the following annual results: average charge per customer = $250; rent = $12,000; total billings = $150,000; employee compensation and benefits = $60,000; and other costs = $110,000. Given these results, Paige's profits would equal _______. a. a loss of $20,000 b. a loss of $32,000 c. $28,000 d. $40,000

b. a loss of $32,000

Custom Hot Rods specializes in restoring or creating custom vehicles and motorcycles for customers who appreciate one-of-a-kind vehicles. Custom Hot Rods typically produces two units each month. If it is able to produce one more unit each month, it will incur _______. a. increased fixed costs b. a marginal cost c. lower average variable costs d. fewer variable costs

b. a marginal cost

The level at which the costs of producing a product equals the revenue made from selling the product is termed _______. a. equilibrium level b. breakeven point c. profit maximization point d. marginal revenue point

b. breakeven point

Costs that don't change with the level of production, such as rent, are referred to as _______ costs. a. inelastic b. fixed c. marginal d. variable

b. fixed

The change in total revenue that would be received when one additional unit is sold is known as _______ revenue. a. fixed b. marginal c. variable d. average

b. marginal

The mathematical result of dividing the percentage change in quantity demanded by the percentage change in price is known as the _______. a. average variable cost b. price elasticity of demand c. marginal cost d. marginal revenue

b. price elasticity of demand

Shelby sold 100,000 widgets at $10 each. Total costs were $700,000. What is Shelby's profit? a. $400,000 b. -$300,000 c. $300,000 d. $0 e. $600,000

c. $300,000

Which of the following mathematical expressions is true about pricing and the generation of a firm's revenue? a. Total costs = price x quantity sold b. Revenue = quantity sold - total costs c. Profit = (price x quantity sold) - total costs d. Profit = price x quantity sold

c. Profit = (price x quantity sold) - total costs

Dry cleaning companies often charge more for women's blouses than men's shirts. They claim that this is because women's blouses require more effort. However, there are many that question this claim. In Miami-Dade County, charging different prices for this service is not allowed. This practice of charging women more than men for the same service is known as _______. a. transfer pricing b. predatory pricing c. price discrimination d. price fixing e. deceptive pricing

c. price discrimination

To use price competition most effectively, an organization should focus on _______ and _______. (Select two) a. keeping product quality high b. meeting demand as it changes c. responding to rivals' price changes d. keeping its costs low

c. responding to rivals' price changes d. keeping its costs low

Back2Nature produces granola bars and protein snacks geared toward hikers and people who spend a lot of time outside. The company announced it would increase product quality by using cage-free eggs and whole grains in its products moving forward. We may expect to see the demand curve to _______. a. shift to the left b. remain the same c. shift to the right d. become curved, like a demand curve for prestige products

c. shift to the right

Identify the type of discount the price is reduced for buyers that pay promptly

cash discount

Scenario 19.1. Chantel, a resident of Denver, Colorado, decided to open up her own fine jewelry store. To do so, she used her life savings and a loan from the bank. Chantel was able to open up a store with sufficient inventory. She markets the jewelry as the "finest jewelry in the West." The most popular item Chantel sells is a rose gold bracelet that sells for $550. During one month, Chantel's fixed costs are $6,000. Her variable costs average about $400. Refer to Scenario 19.1. How many rose gold bracelets would Chantel have to sell to break even? a. 54 b. 50 c. 24 d. 40 e. 37

d. 40

Rex is opening a retail outlet and will primarily sell used video games and game systems. Which of the following would most likely represent a fixed cost for Rex? a. Employee compensation b. Electricity c. Advertising expenditures d. Building rent

d. Building rent

Scenario 19.3. A few months before, a major B2B supplier raised prices of its products 10 percent to cover changes in market conditions. He was surprised to find how the orders from his normal customers plummeted. His normal order was $1,100. After the price increase, the average order dropped by 25 percent. He became concerned that customers might look elsewhere. For this reason, he decided to start offering discounts. When one of his loyal customers, David, purchases $950 worth of product for his firm, the supplier gives David the terms "4/20 net 30." He wants to maintain his relationship with David and would ideally like to receive payment in less than a month. Refer to Scenario 19.3. What type of discount is the supplier offering David? a. Allowance b. Trade c. Cumulative d. Cash e. Transfer

d. Cash

A business marketer may offer _______ pricing that involves reducing a product's price relative to the transportation costs or other costs associated with the physical distance between buyer and seller. a. allowance b. trade c. cash d. geographic

d. geographic

Price is a key element in the marketing mix because it relates directly to the generation of total _______. a. market share b. profits c. price competition d. revenue

d. revenue

Discounts that are used to attract and keep effective resellers by compensating them for performing certain functions such as transportation or warehousing are called _______ discounts. a. seasonal b. cash c. allowance d. trade

d. trade

Sweet Things is a bakery specializing in cupcakes, cookies, and pies. The owners purchase ingredients such as sugar, flour, spices, baking soda, chocolate, and butter as raw materials to create their sweet treats. These ingredients or raw materials would most likely be classified as _______ costs. a. marginal b. sunk c. fixed d. variable

d. variable

Scenario 19.3. A few months before, a major B2B supplier raised prices of its products 10 percent to cover changes in market conditions. He was surprised to find how the orders from his normal customers plummeted. His normal order was $1,100. After the price increase, the average order dropped by 25 percent. He became concerned that customers might look elsewhere. For this reason, he decided to start offering discounts. When one of his loyal customers, David, purchases $950 worth of product for his firm, the supplier gives David the terms "4/20 net 30." He wants to maintain his relationship with David and would ideally like to receive payment in less than a month. Refer to Scenario 19.3. How much would David have to pay if he pays in 25 days? How much would he have to pay in 19 days? a. $950; $665 b. $923; $950 c. $912; $950 d. $950; $760 e. $950; $912

e. $950; $912

Scenario 19.4. Anthony has purchased a new shipment of 50 Bluetooth earbuds that he plans to sell for $99.99 each. The manufacturer informs Anthony that each product will cost Anthony $52, but this does not include the cost of transportation. Even with the extra transportation costs, Anthony is not worried. He believes he can sell all 50 earbuds by the end of the month. After adding up inventory, transportation, storage, and other costs, he determines that his total costs will be $3,750. Refer to Scenario 19.4. The $52 quote Anthony got was the _______ price. a. F.O.B. destination b. zone c. freight absorption d. base-point e. F.O.B. factory

e. F.O.B. factory

What happens if revenue and cost remain constant? a. The breakeven point would be much lower b. Marginal revenue would always exceed marginal cost c. Costs could be significantly reduced d. Fixed costs could be kept at a minimum e. Prices could be set for maximum profits

e. Prices could be set for maximum profits

Apple has recently released a new version of the iPhone. To encourage Apple fans to purchase the newer version, Apple informs users that they can come to Apple stores to trade in their older iPhones and receive a discount on the newest one. This is known as a(n) _______. a. seasonal discount b. noncumulative discount c. trade discount d. cumulative discount e. allowance

e. allowance

Scenario 19.1. Chantel, a resident of Denver, Colorado, decided to open up her own fine jewelry store. To do so, she used her life savings and a loan from the bank. Chantel was able to open up a store with sufficient inventory. She markets the jewelry as the "finest jewelry in the West." The most popular item Chantel sells is a rose gold bracelet that sells for $550. During one month, Chantel's fixed costs are $6,000. Her variable costs average about $400. Refer to Scenario 19.1. When Chantel raised the price of her rose gold bracelets by $75 to cover unexpected expenses, she was surprised to see that demand appeared to increase. She was making more sales at a higher price. This means the rose gold bracelets are _______. a. elastic b. value conscious c. price conscious d. typical products e. inelastic

e. inelastic

Identify the effects of price elasticity on total revenue total revenue increases with a decrease in price

elastic demand

Identify the effects of price elasticity on total revenue total revenue moves in the opposite direction to the shift in price

elastic demand

Identify the effects of price elasticity on total revenue total revenue moves in the same direction as the shift in price

inelastic demand

Identify the type of discount the price is reduced for customers who buy in large quantities

quantity discount

the price is reduced for buyers that make purchases during off-peak periods

seasonal discount

Identify the type of discount the list price is reduced for intermediaries that perform a function

trade discount

When the buyer pays for delivery of a business product, the price is quoted as F.O.B. 1. ____________ , but when the seller pays for delivery the price is quoted as F.O.B. 2. _____________. 1. a. factory b. discount c. transportation d. destination 2. a. discount b. factory c. destination d. transportation

1. a. factory 2. c. destination

Because gasoline is inelastic, this makes it a prestige product. True False

False

Scenario 19.3. A few months before, a major B2B supplier raised prices of its products 10 percent to cover changes in market conditions. He was surprised to find how the orders from his normal customers plummeted. His normal order was $1,100. After the price increase, the average order dropped by 25 percent. He became concerned that customers might look elsewhere. For this reason, he decided to start offering discounts. When one of his loyal customers, David, purchases $950 worth of product for his firm, the supplier gives David the terms "4/20 net 30." He wants to maintain his relationship with David and would ideally like to receive payment in less than a month. Refer to Scenario 19.3. Consider how the average order amount changed when prices were raised $75. The elasticity of demand is _______. With this in mind, the product can best be described as _______. a. 1.0; elastic b. 0.4; elastic c. 0.4; inelastic d. 2.5; inelastic e. 2.5; elastic

e. 2.5; elastic