Question 1

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 where the company's revenue equals its costs, so to calculate the break-even point, we need to find the quantity of units sold that will cover the fixed costs. This is done by dividing the total fixed costs by the contribution per unit (the selling price per unit minus the variable cost per unit). Therefore, the correct answer is to divide fixed costs by contribution per unit, which is option D.

Question 2

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, as consumers will look for alternatives to natural gas heating.

Question 3

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, as the availability of spaces to dock them is crucial for the value and usability of the yachts. Bill's difficulty in selling large yachts is due to the lack of complementary products in the local market.

Question 4

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 = Price per unit - Variable cost per unit
= $100 - $20
= $80
This means that for each room rented, $80 of profit is contributed towards fixed costs and overall profit.

Question 5

Liz and Sarah watched the prices of all the ingredients in their line of specialty sauces go up and up.Now,transportation costs were going through the roof.Liz suggested they could raise prices to cover these expenses because customers would understand.Which of these is the most important factor Liz and Sarah should consider before raising prices?
A)The costs might go back down again.
B)They will have to adjust their promotional literature.
C)Customers do not care about the company's costs; they care about value.
D)Rental costs for their production facility might go up next.
E)Consumers do not think about the cost of additional items; they are concerned mostly with the total cost for a visit to a store.

Accepted Answer

Customer perception of value is crucial when considering raising prices. While Liz and Sarah may need to cover their expenses, customers will not want to pay more without feeling like they are getting additional value or benefits from the product. It is also worth considering that raising prices too much could lead customers to switch to a cheaper alternative. Factors such as the possibility of costs going back down or adjusting promotional literature are important, but they should not be the deciding factor when it comes to pricing decisions.

Question 6

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)monthly rent on the restaurant building.
D)energy costs.
E)hours worked by the waiters and waitresses.

Accepted Answer

Monthly rent on the restaurant building is a fixed cost and not a variable cost. All other options listed are variable costs that will increase if the restaurant stays open longer in the evening.

Question 7

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

The break-even point is the point at which the total revenue equals total cost, and hence, there is no profit or loss. Therefore, profits are zero at the break-even point.

Question 8

Variable costs,primarily labor and materials,are those costs that vary with:
A)seasonal demand.
B)quality of the product.
C)automation.
D)production volume.
E)All of these.

Accepted Answer

Variable costs are those costs that vary with the production volume. As production volume increases, more labor and materials are required, resulting in increased variable costs. Variable costs are not affected by seasonal demand, quality of the product, or automation. Therefore, the best choice is D – production volume.

Question 9

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 10

Often,at the beginning of a semester,professors are encouraged or directed to allow students to be added to a class after the course has started.For the university,the variable cost of adding another student to a class:
A)is the cost of the instructor.
B)is the cost of energy in the classroom.
C)is the cost of adding another administrator.
D)is the cost of expanding the parking lot.
E)is next to nothing.

Accepted Answer

Adding another student to a class does not typically incur any significant variable cost for the university. The cost of the instructor, energy in the classroom, and parking lot expansion are all fixed costs that are not affected by adding one more student to the class. Similarly, adding another administrator is also a fixed cost that is not directly related to the number of students in a class. Therefore, the best choice is E - the variable cost of adding another student to a class is next to nothing.

Question 11

Labor,materials,and energy are typically __________ costs.
A)fixed
B)incidental
C)prestige
D)inelastic
E)variable

Accepted Answer

Labor, materials, and energy costs are variable costs as they are directly related to the quantity of goods or services produced. The more products a company produces, the more labor, materials, and energy it will need, leading to higher variable costs.

Question 12

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

Accepted Answer

If the price for a product increases, consumers may switch to substitute products that are relatively cheaper than the original product. As a result, the demand for the substitute product will increase.

Question 13

One problem in relying on price elasticity and demand curves when setting prices is that:
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. This means that relying solely on price elasticity and demand curves may not always provide an accurate measure of consumer behavior and pricing. Other factors such as branding, advertising, and customer perception can also influence demand and willingness to pay for a product or service.

Question 14

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 costs that vary with the quantity of goods or services produced. As such, changes in the quantity being produced will directly affect variable costs.

Question 15

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 16

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

The law of demand states that as the price of a good increases, the demand for its complementary good will decrease. This is because the increase in price of the initial good will cause consumers to reduce their demand for both goods, resulting in a decrease in demand for the complementary good.

Question 17

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 their products.
B)increase demand for their products.
C)decrease the income effect for their products.
D)increase the complementary effect for their products.
E)decrease demand for their products.

Accepted Answer

The answer of Managers of Wendy's fast food restaurants keep...

Question 18

Internet comparison shopping sites like Shopping.com and Pricegrabber.com allow consumers to compare prices of substitute products much more easily than is possible without the Internet.These sites have:
A)reduced the price elasticity demand for individual products.
B)increased the cross-price elasticity for substitute products.
C)increased the income effect on price elasticity of demand.
D)reduced the cross-price elasticity of demand for complementary goods.
E)decreased the price elasticity of demand for groups of similar products.

Accepted Answer

Internet comparison shopping sites have increased the cross-price elasticity for substitute products. This is because consumers are able to easily compare the prices of similar products from different sellers or brands, making them more sensitive to price differences and more likely to switch to a lower-priced substitute.

Question 19

___________________ are costs that remain constant as the volume of production increases or decreases.
A)Fixed costs
B)Variable costs
C)Beneficial costs
D)Contribution per unit costs
E)Break-even point costs

Accepted Answer

Fixed costs remain constant regardless of changes in production volume. Examples include rent, salaries of permanent employees, and insurance premiums.

Question 20

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

Consumers ultimately make their purchase decisions based on the perceived value of a product, rather than its production costs. Setting prices solely based on costs could result in pricing a product too high or too low compared to its perceived value, potentially leading to lost sales or decreased profitability.

Quiz 13: Pricing Concepts for Establishing Value

The break-even point is estimated by:

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

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:

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:

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:

At the break-even point:

Variable costs,primarily labor and materials,are those costs that vary with:

Often,at the beginning of a semester,professors are encouraged or directed to allow students to be added to a class after the course has started.For the university,the variable cost of adding another student to a class:

Labor,materials,and energy are typically __________ costs.

If the price for a product increases,the demand for a substitute product will:

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

Variable costs change with:

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:

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:

Internet comparison shopping sites like Shopping.com and Pricegrabber.com allow consumers to compare prices of substitute products much more easily than is possible without the Internet.These sites have:

___________________ are costs that remain constant as the volume of production increases or decreases.

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