101. Identify and discuss the six steps of the pricing procedure.

101. Identify and discuss the six steps of the pricing procedure.

102. Under what conditions is demand likely to be less elastic for a product?

103. What is experience-curve pricing and what risks does it carry?

104. An increasing number of companies are basing their prices on the customer’s perceived value. Explain the concept of “perceived value” and identify the key to pricing in this manner.


105. Explain why “value pricing” is not just a matter of simply setting lower prices.

106. In a classic study, Farris and Reibstein examined the relationships among relative price, relative quality, and relative advertising for 227 consumer businesses. List and briefly explain their findings.

107. For price discrimination to work, certain conditions must exist. List and briefly explain these conditions.

108. In responding to a competitor’s price cut, a firm in a nonhomogeneous market has more latitude and should consider what four issues before responding?



Multiple Choice

109. When a consumer buys a $100 bottle of perfume containing $10 worth of materials, the gift giver is communicating their high regard to the receiver, and this represents the concept of ________ in pricing.

a. maximum current profit

b. price–quality relationship

c. reference prices

d. price cues

e. price leadership

110. When a retailer puts a sign on a product that says “reduced” or a retailer puts a sign on a product that says “compare toXXX at $10.00 more,” the retailer is encouraging what kind of pricing psychology for its shoppers?

a. Reference pricing

b. Price cues

c. Price leadership

d. Going-rate pricing

e. None of the above

111. Research has shown that consumers tend to process prices in a “left-to-right” manner rather than by rounding. With this knowledge, which of the following prices would seem to be a better physiological price?

a. $101.99

b. $109.50

c. $99.99

d. $100.00

e. none of the above

112. You are introducing a new product to the market; in fact, you are first with this new product to the marketplace. In developing your pricing strategy, it was decided that the price of the product should be at the maximum the market would bear. This is an example of what type of pricing strategy?

a. Product-quality leadership

b. Market-skimming pricing

c. Market-penetration pricing

d. Going-rate pricing

e. Prestige pricing


113. Texas Instruments builds a large plant to produce a great quantity of products, hoping that as prices decline, sales volume increases and thus costs decline. This market-penetration pricing is dependent upon three conditions existing in the marketplace. Which one of the following is NOT one of these conditions?

a. Low price discourages competition from entering the market.

b. Production and distribution costs actually fall with increases in production.

c. Low prices does not increase consumer demand but increases retailer competition.

d. The market is stimulated by lower prices.

e. The market is highly price sensitive.

114. Starbucks coffee, Aveda shampoo, and BMW cars have been able to position themselves within their categories by combining quality, luxury, and premium prices with an intensely loyal customer base. These companies are employing a ________ strategy.

a. market-skimming

b. short-term profit maximization

c. survival

d. market share maximization

e. product-quality leadership

115. If consumers were largely indifferent to a $0.10 increase in the price of a gallon of milk, the rise can be said to fall within customers’ ________.

a. price indifference band

b. price elasticity zone

c. price inelasticity range

d. coefficient of ambivalence

e. none of the above

116. The demand for your product fell 66% when the price increased by 50%. This is an example of what type of demand?

a. Coefficient

b. Inelastic

c. Elastic

d. Unitary

e. none of the above


117. The quantity demanded of your firm’s product increased only 5% when the price of each unit was reduced by 33%. This is an example of what type of demand?

a. Elastic

b. Coefficient

c. Unitary

d. Inelastic

e. None of the above

118. Manufacturing costs such as rent, utilities, interest expense, and some salaries are considered ________ and these costs do not vary with the production or sale of the item.

a. corporate overhead

b. division overhead

c. overhead

d. fixed costs

e. variable

119. At 1,000 calculators per day, Texas Instrument’s factory is running at full capacity. This means that the cost of each calculator is now at its ________ cost.

a. total

b. average

c. lowest

d. highest

e. undetermined

120. If variable costs are $10 per unit, fixed costs are $300,000, and expected unit sales are 50,000, the unit cost is ________.

a. $16.00

b. $6.00

c. $20.00

d. $10.00

e. none of the above

121. Following the industry average, your firm accepts a 20% markup on sales. If the unit cost of your product is $20.00, then the retail price would be ________.

a. $48.00

b. $40.00

c. $44.00

d. $22.00

e. $24.00


122. Your company has invested $1,000,000 in plant and equipment and wants to ensure that it receives a 20% ROI on the pricing of its products. This 20% translates into $200,000. At a $16.00 cost and a 50,000 expected sales volume, at what price must your product “go out the door” to satisfy this ROI return?

a. $24.00

b. $20.00

c. $40.00

d. $44.00

e. none of the above

123. The formula for the break-even volume calculation is ________.

a. (price – variable costs)/fixed costs

b. fixed costs/(price – variable costs)

c. fixed costs/unit sales

d. fixed costs/(variable costs – price)

e. fixed costs X (variable costs – price)

124. In oligopolistic industries that sell a commodity, firms base their prices largely on competitors’ prices. This is an example of ________.


b. countertrade

c. price discrimination

d. going-rate pricing

e. high-low pricing

125. Baxter Healthcare, a leading medical products firm, was able to secure a contract for an information management system from Columbia/HCA, a leading health care provider, by guaranteeing the firm several million dollars in savings over an eight-year period. This is an example of ________.

a. market-skimming pricing

b. geographical pricing

c. auction-type pricing

d. going-rate pricing

e. gain-and-risk-sharing pricing


126. In exchange for the distribution of your products overseas, your firm has accepted to receive a shipment of imported products in trade. This is an example of what type of countertrade?

a. Offset

b. Barter

c. Compensation deal

d. Buyback agreement

e. None of the above

127. Florida hotels discount the cost of their hotel rooms during the hot summer months. On the other hand, during the winter months, the price of these rooms increases. This is an example of what type of discount?

a. Seasonal

b. Functional

c. Quantity

d. Promotional allowance

e. None of the above

128. The popularity of “early-bird” specials at restaurants is an example of what type of price discrimination?

a. Time pricing

b. Channel pricing

c. Image pricing

d. Product-form pricing

e. Customer-segment pricing

Short Answer

129. Your company is considering employing a “freemium” strategy. Identify five guidelines for success using this strategy.


130. Explain how Armani uses consumer psychology to charge at least 20 times more for a black T-shirt than do Gap or H&M.

131. What is market skimming and where might you see market-skimming pricing practiced in consumer goods?

132. When the salesperson at the local luxury car dealer pitches a customer on the dealer’s “free maintenance for 36 months or 36,000 miles whichever comes first,” the salesperson is trying to overcome the car’s initial high cost by using what method?


133. Identify and describe three methods companies can use to attempt to measure their demand curves.

134. How can the Internet impact consumer price sensitivity?


How would you explain the concept of “price elasticity” to a co-worker?

135. Explain the relationship between fixed costs, variable costs, total cost, and average cost.

136. As a newly hired marketing associate, you have been given the responsibility to reduce the costs of your product by utilizing a process called “target costing.” Explain how you would go about implementing a target costing program.

137. Explain the difference between everyday low pricing (EDLP) and high-low pricing.


138. How do EDLP and high-low pricing strategies affect consumer price judgments?

139. As a small firm in a commodity industry, you are often faced with a pricing policy that can best be described as “going-rate pricing.” Explain how this pricing policy works.

140. Your local retailer has instituted an EDLP pricing program for his stores. What would one of the reasons be for the retailer to adopt an EDLP pricing policy?

141. IKEA and Southwest Airlines are among the best practitioners of value pricing—win loyal customers by charging a fairly low price for a high-quality offering. Why is value pricing not a matter of simply lowering prices?

142. As the marketing manager for your product, you have been forced to take a price increase due to cost pressures from your suppliers. After adjusting for customer and consumer demand fluctuations and elasticity, you feel that you have accounted for all possible reactions. Your boss, however, feels differently and says that your recommendations are not complete. What other factors, besides consumer/customers, are affected by price changes?


143. Your company has recently sold its resin-producing plant in India to a local concern. As part of the sales price, your company agrees to accept as partial payment the production of the resin at an agreed upon price for six years. This is an example of what type of countertrade?

144. In attempt to “rein in” the continued discounting by the sales force, you implement a net price analysis program to arrive at the “real price” of your products. Describe the steps necessary to implement such a program.

145. Movie matinees are priced lower than the evening shows; afternoon ball games are sometimes priced cheaper than the evening games, television advertising costs less when run after midnight. These are examples of what type of price discrimination?

Suggested Answer:These are examples of time pricing discrimination.

146. When is price discrimination legal?

147. When a company initiates a price cut in an attempt to dominate the market through lower costs (such as the $1.00 special lunch menus at key fast-food restaurants), the company must ensure that it does not fall into certain low-cost traps. List these four “traps.”

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