Question 1

The break-even point is the intersection of the total cost curve and the total profit curve.

Accepted Answer

Break-even point (BEP) is the quantity where the firm's total cost will just equal its total revenue.

Question 2

Average-cost pricing works well if the firm actually sells the quantity which was used in setting the price, but losses may result if actual sales are much higher than were expected--due to higher total variable costs.

Accepted Answer

Average-cost pricing works well if the firm actually sells the quantity it used to set the average-cost price. Losses may result, however, if actual sales are much lower than expected.

Question 3

Changes in total cost depend on variations in total variable cost, since total fixed cost stays the same.

Accepted Answer

Changes in total cost depend on variations in total variable cost, since total fixed cost stays the same.

Question 4

Ignoring demand is the major weakness of average-cost pricing.

Accepted Answer

Ignoring demand is the major weakness of average-cost pricing.

Question 5

A firm's average fixed cost increases as its output increases.

Accepted Answer

Average fixed cost goes down steadily as the quantity increases.

Question 6

A firm's total cost increases only when its variable cost increases.

Accepted Answer

Changes in total cost depend on variations in total variable cost, since total fixed cost stays the same.

Question 7

Even if a firm's average variable cost remains constant per unit, its average cost will increase as output increases.

Accepted Answer

Although the average variable cost remains the same, average cost decreases continually.

Question 8

Break-even analysis evaluates whether the firm will be able to cover all its costs with a particular price.

Accepted Answer

Break-even analysis evaluates whether the firm will be able to break even, that is, cover all its costs with a particular price.

Question 9

If a manager sells more than was expected when average-cost pricing was used to set a price, the firm will lose money.

Accepted Answer

Average-cost pricing works well if the firm actually sells the quantity it used to set the average-cost price. If sales are much higher than expected, then profits may be very good.

Question 10

Average-cost pricing works best in situations where demand conditions do not change a lot.

Accepted Answer

When demand conditions are changing, average-cost pricing is even more risky.

Question 11

When setting prices, the marketing manager should consider the firm's demand curve, or else the price may not even cover the firm's total cost.

Accepted Answer

Unless the firm's demand curve is considered, the marketing manager may set a price that doesn't even cover a firm's total cost.

Question 12

A major advantage of average-cost pricing is that it assumes costs remain constant at different levels of output.

Accepted Answer

The basic problem with the average-cost approach is that it doesn't consider cost variations at different levels of output.

Question 13

Average fixed costs are lower when a large quantity is produced.

Accepted Answer

Average fixed cost goes down steadily as the quantity increases.

Question 14

Total fixed costs do not change when output increases.

Accepted Answer

Total fixed cost is the sum of those costs that are fixed in total, no matter how much is produced.

Question 15

At zero output, total variable cost is zero.

Accepted Answer

At zero output, total variable cost is zero.

Question 16

If the price per unit is $1.00 and the average variable cost per unit is 60 cents, the fixed cost contribution per unit is $1.40.

Accepted Answer

Fixed cost (FC) contribution per unit is the assumed selling price per unit minus the variable cost per unit.

Question 17

An advantage of average-cost pricing is that it considers competitors' costs and prices.

Accepted Answer

A danger of average-cost pricing is that it ignores competitors' costs and prices.

Question 18

Average fixed cost goes down as output decreases.

Accepted Answer

Average fixed cost goes down steadily as the quantity increases.

Question 19

As output increases, a firm's average fixed cost probably will go down.

Accepted Answer

Average fixed cost goes down steadily as the quantity increases.

Question 20

If a firm's average variable cost is constant per unit, then the firm's average cost decreases continually as output increases because average fixed cost decreases continually.

Accepted Answer

Although the average variable cost remains the same, average cost decreases continually and this is because average fixed cost is decreasing.

Quiz 17: Price Setting in the Business World

The break-even point is the intersection of the total cost curve and the total profit curve.

Average-cost pricing works well if the firm actually sells the quantity which was used in setting the price, but losses may result if actual sales are much higher than were expected--due to higher total variable costs.

Changes in total cost depend on variations in total variable cost, since total fixed cost stays the same.

Ignoring demand is the major weakness of average-cost pricing.

A firm's average fixed cost increases as its output increases.

A firm's total cost increases only when its variable cost increases.

Even if a firm's average variable cost remains constant per unit, its average cost will increase as output increases.

Break-even analysis evaluates whether the firm will be able to cover all its costs with a particular price.

If a manager sells more than was expected when average-cost pricing was used to set a price, the firm will lose money.

Average-cost pricing works best in situations where demand conditions do not change a lot.

When setting prices, the marketing manager should consider the firm's demand curve, or else the price may not even cover the firm's total cost.

A major advantage of average-cost pricing is that it assumes costs remain constant at different levels of output.

Average fixed costs are lower when a large quantity is produced.

Total fixed costs do not change when output increases.

At zero output, total variable cost is zero.

If the price per unit is $1.00 and the average variable cost per unit is 60 cents, the fixed cost contribution per unit is $1.40.

An advantage of average-cost pricing is that it considers competitors' costs and prices.

Average fixed cost goes down as output decreases.

As output increases, a firm's average fixed cost probably will go down.

If a firm's average variable cost is constant per unit, then the firm's average cost decreases continually as output increases because average fixed cost decreases continually.