Question 1

The contribution per unit is
A) price minus total costs.
B) price minus total variable cost.
C) price minus variable cost per unit.
D) total revenue minus total cost.
E) break-even quantity divided by total fixed costs.

Accepted Answer

Contribution per unit is the amount of revenue that remains after deducting the variable cost per unit. Therefore, the best choice is C, which is the price minus variable cost per unit. Option A is incorrect because it does not take into account the variable costs. Option B is wrong because it considers only variable costs and not fixed costs, which must also be taken into account. Option D is incorrect because it does not calculate the contribution per unit but rather the overall profit or loss. Option E is unrelated to the calculation of contribution per unit.

Question 2

At the break-even point,
A) costs are zero.
B) price is maximized.
C) profits are zero.
D) fixed costs are zero.
E) contribution per unit is zero.

Accepted Answer

At the break-even point, a company has sold enough units to cover all of its costs, but has not yet generated a profit. Therefore, profits will be at zero at the break-even point.

Question 3

In general, prices should not be based on costs because
A) consumers are cost-conscious.
B) producers rarely know what their costs are.
C) consumers make their purchase decisions based on perceived value.
D) producers need to avoid creating a cost competitive parity debate.
E) customers are always right.

Accepted Answer

Prices should be based on perceived value for consumers, as their purchase decisions are largely influenced by whether they believe the price is worth the product or service they are getting. Cost may be a factor in determining the minimum price a producer can charge to make a profit, but ultimately, the price should be determined based on what the consumer is willing to pay for the perceived value of the product or service.

Question 4

David manages a Shoney's restaurant. He is considering staying open later in the evening. For David, the variable costs associated with staying open longer hours will include all of the following except
A) ingredients used in preparing food.
B) hours worked by cooks.
C) rent on the restaurant building.
D) energy costs.
E) hours worked by the servers.

Accepted Answer

Rent on the restaurant building is a fixed cost that does not change with the number of hours the restaurant is open. Therefore, it is not included in the variable costs associated with staying open longer hours.

Question 5

Raymond 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 Raymond, the total cost of opening the new branch and remaining open for one year will be
A) $500,000.
B) $550,000.
C) $650,000.
D) $450,000.
E) $605,000.

Accepted Answer

The total cost includes the fixed costs ($500,000) plus the variable costs associated with servicing the new customer accounts (1,000 accounts * $50/account = $50,000), totaling $550,000.

Question 6

Jacob 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 Jacob, the contribution per unit is
A) $100.
B) $80.
C) $800.
D) $1,000.
E) It cannot be determined from the information provided.

Accepted Answer

Contribution per unit = Selling price per unit - Variable cost per unit= $100 - $20= $80

Question 7

Variable costs change with
A) changes in fixed costs.
B) changes in cross-price elasticity.
C) changes in target return pricing.
D) changes in the quantity being produced.
E) competitive parity.

Accepted Answer

Variable costs are expenses that change in relation to the quantity being produced or sold. Therefore, changes in the quantity being produced directly impact variable costs.

Question 8

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

Accepted Answer

Smartphone service providers are typically characterized by oligopolistic competition, with a few major companies dominating the market and setting prices. This is evidenced by the fact that the largest providers (Verizon, AT&T, Sprint, and T-Mobile) hold a significant share of the market and engage in intense competition for customers through advertising and pricing strategies.

Question 9

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
A) 100 units.
B) 4,000 units.
C) 20 units.
D) 1,000 units.
E) 250 units.

Accepted Answer

The answer of If the fixed costs of manufacturing a...

Question 10

Break-even analysis is useful because it allows managers to
A) quantify the relationship between price elasticity and product elasticity.
B) reposition products based on their break-even positioning revenue.
C) estimate the quantity they will need to sell at a given price to break even.
D) determine the relationship between price and quantity demanded.
E) analyze the different elements contributing to their variable costs.

Accepted Answer

Break-even analysis helps managers estimate the quantity they need to sell at a given price to reach the break-even point, where total revenue equals total costs. This information can be useful in setting sales targets, pricing strategies, and assessing the financial viability of a product or service. While it can provide insights into variable costs, price elasticity, and quantity demanded, these are not the primary focus of break-even analysis.

Question 11

If the price for a product increases, the demand for the complementary product will
A) decrease.
B) increase.
C) stay the same.
D) become more elastic.
E) become more inelastic.

Accepted Answer

When the price of a product increases, consumers may switch to cheaper alternatives or reduce their overall consumption. As a result, the demand for complementary products that are typically consumed together with the first product, such as bread and butter, will decrease.

Question 12

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
A) increase the income effect for Wendy's products.
B) increase demand for Wendy's products.
C) decrease the income effect for Wendy's products.
D) increase the complementary effect for Wendy's products.
E) decrease demand for Wendy's products.

Accepted Answer

A decrease in prices at competitors like McDonald's, Burger King, and Arby's makes those options more attractive to consumers, leading to a decrease in demand for Wendy's products as consumers may choose the cheaper alternatives.

Question 13

Bill 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
A) substitute products.
B) purely competitive products.
C) status quo pricing products.
D) complementary products.
E) competitive parity products.

Accepted Answer

Yachts and spaces to dock them are complementary products. The demand for large yachts is dependent on the availability of appropriate spaces to dock them. If there are no appropriate spaces to dock these yachts, their value decreases, and the demand for yachts is likely to decline. Therefore, the supply and demand for yachts and docking spaces are interdependent and complementary to each other.

Question 14

Consider a bakery like Entenmann's: The majority of the ________ costs are the cost of the ingredients, primarily flour.
A) fixed
B) incidental
C) prestige
D) inelastic
E) variable

Accepted Answer

Variable costs are costs that change with the level of production or sales volume, and the cost of ingredients would fall under this category for a bakery like Entenmann's. Fixed costs would remain the same regardless of the level of production, incidental costs would refer to unexpected or one-time expenses, prestige costs would refer to costs associated with enhancing the brand image, and inelastic costs would refer to costs that do not change with changes in production or sales volume.

Question 15

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

Accepted Answer

Break-even analysis assumes that there is only one price at which the product or service is sold. This simplification overlooks the possibility of selling the product at various prices, which could significantly impact the break-even point and overall profitability.

Question 16

Frank's Heating and Air Conditioning Company specializes in electric heat pumps. Frank keeps track of the price of natural gas, knowing that
A) natural gas creates more environmental greenhouse effects than coal.
B) an increase in the price of natural gas will increase demand for his electrical heating systems.
C) gas heating systems and electrical heating systems are complementary goods.
D) when the price of natural gas goes up, the quantity demanded also rises.
E) the demand for natural gas is price elastic.

Accepted Answer

An increase in the price of natural gas will increase demand for his electrical heating systems because people will be looking for alternative heating sources that are not affected by the rising price of natural gas.

Question 17

One problem in relying on price elasticity and demand curves when setting prices is
A) the way a product or service is marketed can have a profound impact on price elasticity.
B) the underlying ideas of the demand curve and elasticity are less relevant in the modern economy.
C) only economists can properly analyze demand curves and set prices using this tool.
D) competitors can construct the same demand curves, so there is no advantage in using them.
E) marketing split from economics over the ideas of demand and elasticity.

Accepted Answer

The way a product or service is marketed can have a profound impact on price elasticity. For example, if a product is marketed as a luxury item, consumers may be more willing to pay a higher price, making demand less elastic. On the other hand, if a product is marketed as a necessity, consumers will be more sensitive to price changes, making demand more elastic. Therefore, relying solely on price elasticity and demand curves when setting prices may not take into account the impact of marketing on consumer behavior.

Question 18

Jason 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 Jason, to earn his target profit, he will need to rent out ________ rooms.
A) 100
B) 1,500
C) 20,000
D) 1,000
E) It cannot be determined from the information provided.

Accepted Answer

To earn his target profit, Jason needs to cover his fixed costs and variable costs, and then make $20,000 in profit.Fixed costs: $100,000Variable cost per room: $20Target profit: $20,000Let x be the number of rooms Jason needs to rent out.Total revenue = $100xTotal variable cost = $20xTotal cost = $100,000 + $20xProfit = Total revenue - Total costWe can set up the following equation:$100x - ($100,000 + $20x) = $20,000$100x - $100,000 - $20x = $20,000$80x = $120,000x = $120,000 / $80x = 1,500Therefore, Jason needs to rent out 1,500 rooms to earn his target profit.

Question 19

The break-even point is estimated by
A) multiplying revenue per unit times the quantity sold.
B) dividing fixed contribution per unit by variable costs.
C) multiplying fixed costs by contribution per unit.
D) dividing fixed costs by contribution per unit.
E) dividing variable costs by fixed costs.

Accepted Answer

The break-even point is the point at which the total revenue received equals the total costs associated with the output of that revenue. To calculate the break-even point, we need to divide the fixed costs by the contribution per unit, which is the selling price per unit less the variable cost per unit. Therefore, option D is the correct answer.

Question 20

Which of the following is the most logical example of complementary products?
A) hot dogs and hamburgers
B) VCRs and DVD players
C) hot dogs and hot dog buns
D) Honda cars and Toyota cars
E) a university and a corporation

Accepted Answer

Hot dogs and hot dog buns are complementary products because they are purchased together and are typically used together.

Quiz 14: Pricing Concepts for Establishing Value

The contribution per unit is

At the break-even point,

In general, prices should not be based on costs because

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

Jacob 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 Jacob, the contribution per unit is

Variable costs change with

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

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

Break-even analysis is useful because it allows managers to

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

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

Bill 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

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

One of the limitations associated with break-even analysis is that

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

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

Jason 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 Jason, to earn his target profit, he will need to rent out ________ rooms.

The break-even point is estimated by

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