Question 1

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
Price per unit = $100
Variable cost per unit = $20
Contribution per unit = $100 - $20 = $80
Therefore, the contribution per unit is $80.

Question 2

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 the perceived value to the consumer rather than solely on production costs because ultimately, it is the consumer who determines whether or not the product is worth the price. Factors such as brand reputation, quality, and demand also play a role in determining perceived value. By focusing solely on costs, producers may miss out on opportunities to maximize profits and meet the needs of their target market.

Question 3

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 calculated by dividing the fixed costs by the contribution per unit, which is the selling price per unit minus the variable cost per unit. This calculation provides the number of units that need to be sold to recover all fixed costs and start making a profit. Option D is correct as it follows this formula. Option A multiplies revenue per unit by the quantity sold which gives total revenue, not the break-even point. Option B divides fixed contribution per unit by variable costs, which is not the formula for calculating the break-even point. Option C multiplies fixed costs by contribution per unit which gives the total contribution margin, not the break-even point. Option E divides variable costs by fixed costs, which is not the formula for calculating the break-even point.

Question 4

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

A decrease in prices at competitors like McDonald's, Burger King, and Arby's would likely lead to a decrease in demand for Wendy's products, as consumers may choose the cheaper alternatives.

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 are 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

Liz and Sarah should consider that customers are more interested in the value they receive from their products than the company's costs. If they raise prices without providing additional value, they risk alienating their customer base. The other factors listed may also be important, but they are not as directly relevant to the decision to raise prices.

Question 6

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

When the price of a product increases, consumers tend to look for a substitute product that is cheaper, thus increasing the demand for the substitute product. This is because the substitute product becomes relatively cheaper in comparison to the original product, and consumers switch their preferences towards the substitute.

Question 7

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

The answer of Jason rents rooms in his hotel for...

Question 8

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 9

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 costs that change in direct proportion to the level of production. These costs are primarily made up of labor and materials, and will increase as production volume increases and decrease as production volume decreases. Seasonal demand, quality of the product, and automation do not necessarily have a direct impact on variable costs.

Question 10

____________ 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 are costs that do not vary with the level of production, such as rent, salaries, and insurance. They remain constant regardless of whether production increases or decreases. Other options such as variable costs, beneficial costs, contribution per unit costs, and break-even point costs all fluctuate with changes in production levels.

Question 11

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, the total revenue equals the total cost, resulting in a profit of zero.

Question 12

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 those costs that vary with the quantity being produced. As the quantity being produced increases or decreases, variable costs will also increase or decrease. Therefore, changes in the quantity being produced affect variable costs.

Question 13

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 like Shopping.com and Pricegrabber.com have increased the cross-price elasticity for substitute products. This is because consumers can now easily compare the prices of different substitute products and make a more informed decision, leading to increased competition among substitute products. As a result, the demand for a particular product becomes more elastic, as consumers have more options and are more price-sensitive.

Question 14

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 to estimate the quantity of product they will need to sell at a given price point to cover all their costs and expenses, and break even. This information can be used to make strategic decisions about setting prices, managing costs, improving profitability, and optimizing business operations.

Question 15

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 difference between the selling price per unit and the variable cost per unit. It is calculated by subtracting variable cost per unit from the selling price per unit. Therefore, the correct choice is C.

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

Frank's Heating and Air Conditioning Company specializes in electric heat pumps, so an increase in the price of natural gas will increase demand for his electrical heating systems as people look to alternatives to gas heating.

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, which means that relying solely on demand curves and price elasticity to set prices may not be sufficient. Other factors such as brand image, competition, and consumer behavior may also need to be considered.

Question 18

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 19

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 is not affected by the number of hours the restaurant stays open. All the other options listed are variable costs that will increase if the restaurant stays open longer.

Question 20

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

Accepted Answer

Labor, materials, and energy costs fluctuate based on the production level or output. Therefore, they are considered variable costs.

Quiz 14: Pricing Concepts for Establishing Value

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

In general,prices should not be based on costs because

The break-even point is estimated by

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

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

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.

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

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

At the break-even point,

Variable costs change with

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

Break-even analysis is useful because it allows managers to

The contribution per unit is

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

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

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

Labor,materials,and energy are typically __________ costs.