Average-cost pricing:
A) May be very profitable if actual sales are higher than expected.
B) May lose money for the firm if actual sales are less than expected.
C) Does not take demand into account in setting prices.
D) Is simple in theory but often fails in practice.
E) All of these alternatives are correct.

Question

Quizplus · Accepted Answer

Average-cost pricing involves setting prices based on the cost of production plus a markup. If actual sales exceed expectations, the firm can indeed be very profitable because the fixed costs are spread over more units, reducing the average cost per unit. Conversely, if sales are less than expected, the firm may not cover its fixed costs, leading to potential losses. This pricing strategy does not directly consider demand but rather focuses on costs, making it somewhat simplistic and potentially ineffective in markets where demand and competition heavily influence pricing. Therefore, all the given alternatives correctly describe aspects of average-cost pricing.

Average-Cost Pricing