Chapter 14

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1

When consumers examine products, they often compare an observed price to an internal price they remember. This is known as a(n) ________ price. A) markup B) reference C) market-skimming D) accumulated E) target

B

2

________ price refers to what the consumers feel the product should cost. A) Fair B) Typical C) Usual discounted D) List E) Maximum retail

A

3

While shopping at the mall, Jane was asked by one of the sales representatives at the cosmetics counter to try out a new lipstick that her company was test marketing. The company representative asks her how much she would be willing to pay for the lipstick. After trying it out, Jane is of the opinion that $5 is just the right price for it. What type of a reference price is Jane using? A) usual discounted price B) fair price C) maximum retail price D) last price paid E) historical competitor price

B

4

The reservation price or the maximum that most consumers would pay for a given product is known as the ________ price. A) expected future B) usual discounted C) upper-bound D) typical E) historical competitor

C

5

A company decided to conduct a market survey for its new MP3 player which it had priced at $150. However, in the survey, 95 percent of the participants said that the maximum they would pay for the MP3 player is $100. This is an example of which of the following possible consumer reference prices? A) historical competitor price B) expected future price C) usual discounted price D) upper-bound price E) last price paid

D

6

The minimum price that most consumers would pay for a given product is known as the ________ price. A) everyday low B) usual discounted C) fair D) typical E) lower-bound

E

7

A company has developed the prototype of a mobile phone which it plans to launch in the next few months. The phone comes equipped with the most advanced technological features. As part of its test marketing efforts, it allows customers to examine and use the prototype and also gathers feedback regarding product features and price. The results of this test marketing effort show that customers are willing to pay at least $500, considering the phone's various features. As such, the company has found out about the customers' ________. A) last paid price B) expected future price C) lower-bound price D) upper-bound price E) typical price

C

8

Many consumers are willing to pay $100 for a perfume that contains $10 worth of scent because the perfume is from a well-known brand. What kind of a pricing is the company depending on? A) going-rate pricing B) image pricing C) market-skimming pricing D) target pricing E) markup pricing

B

9

Pricing cues such as sale signs and prices that end in 9 are more influential ________. A) when customers have substantial knowledge about prices B) when customers purchase the particular item regularly C) when product quality is standardized D) when product designs vary over time E) when prices do not vary from time to time

D

10

Which of the following is the first step in setting a pricing policy? A) selecting a pricing method B) selecting the pricing objective C) determining demand D) estimating cost E) analyzing competitors' costs, prices, and offers

B

11

After determining its pricing objectives, what is the next logical step a firm should take in setting its pricing policy? A) It should analyze its competitors' costs, prices, and offers. B) It should select its pricing method. C) It should select its final price. D) It should determine the demand for its product. E) It should estimate the cost of its product.

D

12

A firm that is plagued with overcapacity, intense competition, or changing wants would do better if it pursues ________ as its major objective. A) market skimming B) product-quality leadership C) survival D) profit maximization E) market penetration

C

13

After estimating the demand and costs associated with alternative prices, a company has chosen to price its product in such a way that it gains the highest rate of return on its investment. The company is looking to ________. A) maximize its market share B) skim the market C) become a product-quality leader D) survive in the market E) maximize its current profit

E

14

Companies who believe that a higher sales volume leads to lower unit costs and higher long-run profits are attempting to ________. A) maximize their market share B) skim the market C) become a product-quality leader D) merely survive in the market E) maximize their current profits

A

15

A company that is looking to maximize its market share would do well to follow ________ pricing. A) markup B) market-penetration C) market-skimming D) survival E) target-return

B

16

A market-penetration pricing strategy is most suitable when _______. A) a low price slows down market growth B) production and distribution costs fall with accumulated production experience C) a high price dissuades potential competitors from entering the market D) the market is characterized by inelastic demand E) a low price encourages actual competition

B

17

When a company introduces a product at a very high price and then gradually drops the price over time, it is pursuing a ________ strategy. A) market-penetration pricing B) market-skimming pricing C) value-pricing D) switching cost E) loss-leader pricing

B

18

When Apple introduced its iPhone, it was priced at $599. This allowed Apple to earn the maximum amount of revenue from the various segments of the market. Two months after the introduction, the price has come down to $399. What kind of a pricing did Apple adopt? A) loss-leader pricing B) market-penetration pricing C) market-skimming pricing D) target-return pricing E) value pricing

C

19

Market skimming pricing makes sense under all the following conditions, EXCEPT ________. A) if a sufficient number of buyers have a high current demand B) if the unit costs of producing a small volume are high enough to cancel the advantage of charging what the traffic will bear C) if the high initial price does not attract more competitors to the market D) if consumers are likely to delay buying the product until its price drops E) if the high price communicates the image of a superior product

D

20

Companies that aim to ________ strive to be affordable luxuries. A) survive in the market B) partially recover their costs C) maximize their market share D) pursue value pricing E) be product-quality leaders

E

21

Starbucks, Aveda, and BMW have been able to position themselves within their categories by combining quality, luxury, and premium prices with an intensely loyal customer base. These companies are employing a ________ strategy. A) market-skimming B) market-penetration C) survival D) market share maximization E) product-quality leadership

E

22

The first step in estimating demand is to ________. A) analyze competitors' cost B) select a pricing method C) understand what affects price sensitivity D) calculate fixed costs E) decipher the experience curve

C

23

Consumers are less price sensitive ________. A) to high cost items B) when they frequently change their buying habits C) when there are more substitutes D) when there are more competitors E) when they do not readily notice higher prices

E

24

Consumers are less price sensitive when ________. A) price is only a small part of the total cost spent on the product over its lifetime B) they perceive the higher prices to be unjustified C) they change their buying habits regularly D) there are many substitutes and competitors in the market E) they are buying high-cost items

A

25

If demand ly changes with a small change in price, the demand is said to be ________. A) strained B) marginal C) inelastic D) flexible E) unit elastic

C

26

If demand changes considerably, with a small change in price, the demand is said to be ________. A) unit elastic B) elastic C) inelastic D) marginal E) strained

B

27

If consumers were largely indifferent to a $0.5 increase in the price of a gallon of milk, the price rise is said to fall within customers' ________. A) price indifference band B) experience curve C) arm's-length price D) learning curve E) net price index

A

28

Which of the following is true regarding price elasticity? A) The higher the elasticity, the lesser is the volume growth resulting from a 1 percent price reduction. B) Within the price indifference band, price changes have little or no effect on demand. C) If demand is elastic, sellers will consider increasing the price. D) Price elasticity does not depend on magnitude and direction of the contemplated price change. E) When demand is inelastic, sellers should lower prices in order to increase total revenue.

B

29

Costs that do not vary with production levels or sales revenue are known as ________. A) overhead costs B) variable costs C) average costs D) opportunity costs E) total costs

A

30

A company must make payments each month for rent, heat, interest, and salaries. These are ________. A) total costs B) fixed costs C) variable costs D) opportunity costs E) target costs

B

31

Costs that differ directly with the level of production are known as ________. A) fixed costs B) overhead costs C) opportunity costs D) target costs E) variable costs

E

32

________ consist of the sum of the fixed and variable costs for any given level of production. A) Total costs B) Average costs C) Opportunity costs D) Learning costs E) Target costs

A

33

________ is the cost per unit at that level of production. A) Target cost B) Average cost C) Marginal cost D) Opportunity cost E) Fixed cost

B

34

The decline in the average cost of production with accumulated production experience is called the ________. A) demand curve B) supply chain C) learning curve D) value chain E) indifference curve

C

35

Experience-curve pricing ________. A) assumes competitors are weak followers B) allows products to project a high quality image C) is applicable only to manufacturing costs D) focuses on reducing fixed costs E) is generally risk-free

A

36

Deducting the desired profit margin from the price at which a product will sell, given its appeal and competitors' prices, is known as ________. A) overhead costing B) target costing C) activity based costing D) benefit analysis E) estimate costing

B

37

Competitors are most likely to react to a price change, when ________. A) the firm has a weak value proposition B) the firm enjoys a monopoly C) there are few competing firms D) the product is heterogeneous E) buyers have limited information

C

38

Which of the following is the most elementary pricing method? A) value pricing B) going-rate pricing C) markup pricing D) target-return pricing E) perceived-value pricing

C

39

Despite its weaknesses, markup pricing remains popular for which of the following reasons? A) Sellers can determine demand much more easily than they can estimate costs. B) By tying the price to cost, the pricing task becomes more sophisticated. C) When all firms in the industry use markup pricing, price competition flourishes. D) Sellers take advantage of buyers when the latter's demand becomes acute. E) Many people feel that cost-plus pricing is fairer to both buyers and sellers.

E

40

A manufacturer has invested $750,000 in a new product and wants to set a price to earn a 15 percent ROI. The cost per unit is $18 and the company expects to sell 50,000 units in the first year. Calculate the company's target-return price for this product. A) $20.25 B) $18.23 C) $18.10 D) $20.70 E) $25.50

A

41

An umbrella manufacturing company's fixed costs are $275,000. The variable cost per unit is $5 and each umbrella is sold at $10. How many units should the firm sell in order to break even? A) 18000 B) 5500 C) 27500 D) 55000 E) 1819

D

42

________ pricing takes into account a host of inputs, such as the buyer's image of the product performance, the channel deliverables, the warranty quality, customer support, and attributes such as the supplier's reputation, trustworthiness, and esteem. A) Perceived-value B) Value C) Going-rate D) Auction-type E) Markup

A

43

The key to perceived-value pricing is to ________. A) reengineer the company's operations B) deliver more unique value than competitors C) adopt subtle marketing tactics compared to competitors D) deliver more value but at a lower cost E) invest heavily in advertising in order to convey superior value

B

44

________ pricing is a matter of reengineering the company's operations to become a low-cost producer without sacrificing quality. A) Value B) Going-rate C) Auction-type D) Markup E) Perceived-value

A

45

A retailer who holds on to a(n) ________ policy charges a constant low price with little or no price promotions and special sales. A) everyday low pricing B) high-low pricing C) low cost D) going-rate pricing E) auction-type pricing

A

46

Matt's retail store offers all its products at $2 lesser than its competitors throughout the year. The store never runs any promotional campaigns or offers any additional special discounts. Matt's retail store is following a(n) ________. A) auction-type pricing policy B) target-plus pricing policy C) everyday low pricing policy D) high-low pricing policy E) going-rate pricing policy

C

47

Everyday low pricing is most suitable if ________. A) consumers are willing to perform activities such as clip coupons to avail of discounts B) consumers tend to associate price with quality C) customers are insensitive to changes in price D) the cost of conducting frequent sales and promotions is high E) consumers have sufficient time to find the best prices

D

48

In ________, the firm bases its price largely on competitor's prices. A) going-rate pricing B) auction-type pricing C) markup pricing D) target-return pricing E) perceived-value pricing

A

49

Which of the following auctions is characterized by one seller and many buyers? A) Walrasian auctions B) ascending bid auctions C) closed auctions D) sealed-bid auctions E) reverse auctions

B

50

In which of the following auctions does the auctioneer first announce a high price for a product and then slowly decreases the price until a bidder accepts? A) a Dutch auction with one buyer and many sellers B) an English auction with one seller and many buyers C) an ascending bid auction D) a sealed-bid auction E) a Dutch auction with one seller and many buyers

E

51

In a(n) ________, the buyer announces something he or she wants to buy, and potential sellers compete to offer the lowest price. A) Dutch auction with one buyer and many sellers B) English auction with one buyer and many sellers C) English auction with one seller and many buyers D) sealed-bid auction E) ascending auction

A

52

________ let would-be suppliers submit only one bid; they cannot know the other bids. A) Descending bid auctions B) Sealed-bid auctions C) English auctions D) Dutch auctions E) Reverse auctions

B

53

In which of the following forms of countertrade do buyers and sellers directly exchange goods, with no money and no third party is involved? A) buyback arrangements B) offsets C) barter D) sealed bids E) compensation deals

C

54

A Japanese firm is ready to sell its recent technological innovation to the U.S. government. But it has asked for 80 percent in cash and the rest in mica. The Japanese firm is looking to enter into a(n) ________ with the U.S. government. A) functional discount B) compensation deal C) buyback arrangement D) offset agreement E) barter deal

B

55

Armac Ltd., is a sluice-box manufacturer based in China. A sluice-box is used for gold prospecting. Armac is interested in selling a few of its machines to an American mining company, but it wants 95 percent of the machines' price in gold and the rest in ores recovered by using the machines. This is an example of a ________. A) buyback arrangement B) functional discount C) barter deal D) compensation deal E) sealed bid

A

56

ROC Engineering, a Chinese shipbuilding company, agrees to build a fleet of submarines for the Sri Lankan navy, for which it will be paid in the local Sri Lankan currency. As per the agreement, ROC must also spend a substantial amount of the money it generates through this deal within the country. In accordance with the contract, ROC buys Sri Lankan tea at a reduced rate. This is an example of which of the following forms of countertrade? A) descending bid B) offset C) barter D) compensation deal E) buyback arrangement

B

57

________ are offered by a manufacturer to trade-channel members if they will perform certain functions, such as selling, storing, and record keeping. A) Consumer promotions B) Quantity discounts C) Functional discounts D) Seasonal discounts E) Trade-in allowances

C

58

When hotels, motels, and airlines offer discounts in slow selling periods, they are said to be offering ________. A) trade discounts B) quantity discounts C) functional discounts D) seasonal discounts E) trade-in allowances

D

59

A(n) ________ is an extra payment designed to gain reseller participation in special programs. A) seasonal discount B) allowance C) discount D) quantity discount E) functional discount

B

60

________ are granted for turning in old item when buying a new one. A) Promotional allowances B) Quantity discounts C) Functional discounts D) Seasonal discounts E) Trade-in allowances

E

61

________ reward dealers for participating in advertising and sales support programs. A) Functional discounts B) Trade discounts C) Promotional allowances D) Rebates E) Quantity discounts

C

62

When supermarkets and department stores drop the price on well-known brands to stimulate store traffic, they are said to be following ________. A) value pricing B) loss-leader pricing C) special event pricing D) high-low pricing E) everyday low pricing

B

63

When Alan bought his car, the bank gave him 24 months to repay his car loan. But when Alan made a request to increase the time frame to 36 months, the bank granted the extension. The bank was willing to offer Alan a ________. A) longer payment term B) warranty contract C) service contract D) special customer price E) special event price

A

64

In ________, the seller charges a separate price to each customer depending on the intensity of his or her demand. A) second-degree price discrimination B) third-degree price discrimination C) psychological discounting D) special-customer pricing E) first-degree price discrimination

E

65

In second-degree price discrimination, the seller charges ________. A) less to buyers of larger volumes B) different prices depending on the season, day, or hour C) a separate price to each customer depending on the intensity of his or her demand D) different prices for different versions of the same product E) different prices for the same product depending on the channel through which it is sold

A

66

In ________, the seller charges different amounts to different classes of buyers. A) perceived value pricing B) third-degree price discrimination C) first-degree price discrimination D) second-degree price discrimination E) psychological discounting

B

67

When museums charge a lower admission fee to students and senior citizens, then this form of price discrimination is known as ________. A) location pricing B) channel pricing C) customer-segment pricing D) special-customer pricing E) loss-leader pricing

C

68

Madame Tussaud's wax museum is a popular tourist attraction in London. The museum charges higher entry rates for tourists compared to locals. This form of price discrimination is known as ________. A) customer-segment pricing B) image pricing C) location pricing D) special customer pricing E) special event pricing

A

69

When Coca-Cola carries a different price depending on whether the consumer purchases it in a fine restaurant, a fast-food restaurant, or a vending machine, then this form of price discrimination is known as ________. A) product-form pricing B) loss-leader pricing C) special event pricing D) channel pricing E) location pricing

D

70

The price of tickets to the opera vary depending on where the person would like to be seated–in the gallery or in the stalls. This is an example of ________. A) channel pricing B) time pricing C) image pricing D) product-form pricing E) location pricing

E

71

When hotels drop their rates on the weekends, then this form of price discrimination is known as ________. A) channel pricing B) image pricing C) product-form pricing D) time pricing E) location pricing

D

72

The airline and hospitality industries use ________, by which they offer discounted but limited early purchases, higher-priced late purchases, and the lowest rates on unsold inventory just before it expires. A) special-customer pricing B) yield pricing C) cash rebates D) location pricing E) customer-segment pricing

B

73

________ refers to selling below cost with the intention of destroying competition. A) Bid rigging B) Loss-leader pricing C) Predatory pricing D) Price discrimination E) Price penetration

C

74

For price discrimination to work ________. A) the market must be segmentable and the segments must show similar intensities of demand B) members in the lower-price segment must be able to resell the product to the higher-price segment C) competitors must be able to undersell the firm in the higher-price segment D) the practice must not breed customer resentment and ill will E) the extra revenue derived from price discrimination must not exceed the cost of segmenting and policing the market

D

75

A low price buys market share but not market loyalty. The same customers will shift to any lower-priced product that may come along. This is called the ________. A) low-price trap B) relative-market-share trap C) shallow-pockets trap D) target-market-share trap E) fragile-market-share trap

E

76

When higher-priced competitors match the lower prices but have longer staying power because of deeper cash reserves, it leads to a(n) ________. A) low-quality trap B) fragile-market-share trap C) price war trap D) escalator trap E) shallow-pockets trap

E

77

A company does not set a final price until the product is finished or delivered. This is known as ________. A) delayed quotation pricing B) an escalator clause C) special-event pricing D) time pricing E) the shallow-pockets trap

A

78

When a company requires the customers to pay today's price and all or part of any inflation increase that takes place before delivery, it is known as ________. A) special-customer pricing B) an escalator clause C) delayed quotation pricing D) unbundling E) time pricing

B

79

When a company maintains its price but removes or prices separately one or more elements that were part of the former offer, such as free delivery or installation, it is known as ________. A) escalating B) differentiation C) unbundling D) reverse discounting E) delayed quotation pricing

C

80

In markets that are characterized by products that are highly homogeneous, how should a firm react to a competitor's reduction in price? A) shrink the amount of the product available B) substitute expensive materials or ingredients C) reduce product features D) reduce product services E) augment the product

E

81

Price is one of the two elements of the marketing mix that produces revenue.

FALSE

82

Traditionally, price was never a major determinant of buyer choice.

FALSE

83

Today, consumers are price takers and accept prices at face value or as given.

FALSE

84

Purchase decisions are based on how consumers perceive prices and what they consider the current actual price to be–not the marketer's stated price.

TRUE

85

Customers usually have a lower price threshold below which prices signal inferior or unacceptable quality, as well as an upper price threshold above which prices are prohibitive and the product appears not worth the money.

TRUE

86

Although consumers may have fairly good knowledge of the range of prices involved, very few can accurately recall specific prices of products.

TRUE

87

When examining products, consumers compare an observed price to an internal reference price they remember or an external frame of reference.

TRUE

88

Many consumers use price as an indicator of quality and value.

TRUE

89

Companies strive to maximize their current profits if they are plagued with overcapacity, intense competition, or changing consumer wants.

FALSE

90

In reality, it is very for firms to estimate their demand and cost functions.

FALSE

91

If firms wish to maximize their market share, they should opt for market-skimming pricing.

FALSE

92

A firm is said to be following a market-skimming pricing strategy, if it introduces a product into the market at a high price and slowly drops the price over time.

TRUE

93

In the case of prestige goods, the demand curve sometimes slopes upward.

TRUE

94

Companies prefer customers who are less price sensitive.

TRUE

95

Price elasticity depends upon the magnitude and direction of the contemplated price change.

TRUE

96

A small change in price of a product within the price indifference band causes a substantial change in the demand of that product.

FALSE

97

Total costs consist of the sum of the fixed and variable costs for any given level of production.

TRUE

98

In target-return pricing, the firm adds a standard markup to the product's cost.

FALSE

99

The key to effectively using perceived-value pricing is to deliver value that is on par with your competitors.

FALSE

100

Value pricing requires a company to reengineer its operations to become a low-cost producer.

TRUE

101

In high-low pricing, retailers charge low prices on an everyday basis with occasional price increases.

FALSE

102

The U.S. government often uses Dutch auctions to procure supplies.

FALSE

103

In a compensation deal, the seller sells a plant, equipment, or technology to another country and agrees to accept as partial payment products manufactured with the supplied equipment.

FALSE

104

Offset is a form of countertrade where sellers receive full payment in cash and agree to spend a substantial amount of the money in the country where they are trading within a stated time period.

TRUE

105

A quantity discount is a price reduction given to those who pay their bills promptly.

FALSE

106

Trade-in allowances reward dealers for participating in advertising and sales support programs.

FALSE

107

Psychological discounting involves setting an artificially high price and then offering the product at substantial savings.

TRUE

108

Loss leader pricing dilutes a company's brand image.

TRUE

109

In first-degree price discrimination, the seller charges less to buyers of larger volumes.

FALSE

110

When firms charge different prices to different customer groups for the same product or service, it is a case of second-degree price discrimination.

FALSE

111

The airline industries implement yield pricing by offering discounted but limited early purchases, higher-priced late purchases, and the lowest rates on unsold inventory just before it expires.

TRUE

112

Price discrimination in all forms is illegal in the United States.

FALSE

113

Predatory pricing, which refers to the concept of selling below cost with the intention of destroying competition, is lawful under certain conditions.

FALSE

114

Companies sometimes initiate price cuts in an attempt to dominate the market through lower costs.

TRUE

115

Cost inflation provokes price increases.

TRUE

116

In a price-war trap, higher-priced competitors match the firm's lower prices but have longer staying power because of deeper cash reserves.

FALSE

117

Escalator clauses are found in contracts for major industrial projects, such as aircraft construction and bridge building.

TRUE

118

Generally, consumers prefer small price increases on a regular basis to sudden, sharp increases.

TRUE

119

Shrinking the amount of product instead of raising the price is a good way to counteract consumer resistances to price increases.

TRUE

120

A company must consider the product's stage in the life cycle and its importance in the company's portfolio before responding to a competitor's price cut.

TRUE