Chapter 10

Principles of Marketing, 16e (Kotler)
Chapter 10 Pricing: Understanding and Capturing Customer Value

1) ________ refers to the amount of money charged for a product or service.
A) Value
B) Cost
C) Price
D) Wage
E) Salary
Answer: C
Skill: Concept
Objective: LO 10.1: Answer the question "What is a price?" and discuss the importance of
pricing in today's fast-changing environment.
Difficulty: Easy
2) ________ is the only element in the marketing mix that produces revenue.
A) Price
B) Product
C) Place
D) Fixed costs
E) Variable costs
Answer: A
Skill: Concept
Difficulty: Easy
3) Which of the following is true with regard to price?
A) Historically, price has had the least perceptible impact on buyer choice.
B) Price is the least flexible element in the marketing mix.
C) Unlike product features and channel commitments, prices cannot be changed quickly.
D) Price is the sum of all the values that customers give up to gain the benefits of having a
product.
E) Prices only have an indirect impact on a firm's bottom line.
Answer: D
AACSB: Analytical thinking
Skill: Concept
Difficulty: Moderate
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Copyright 2016 Pearson Education, Inc.
4) Prices have a direct impact on a firm's bottom line.

Answer: TRUE
AACSB: Application of knowledge
Skill: Concept
Difficulty: Easy
5) List some important characteristics of price.
Answer: Price is the only element in the marketing mix that produces revenue; all other
elements represent costs. Price is also one of the most flexible marketing mix elements. Unlike
product features and channel commitments, prices can be changed quickly.
AACSB: Application of knowledge; Written and oral communication
Skill: Concept
6) Why is price considered one of the most flexible elements of the marketing mix?
Answer: Unlike product features and channel commitments, prices can be changed quickly.
Skill: Concept
Difficulty: Easy
2
7) Define price. Discuss its importance.

Answer: In the narrowest sense, price is the amount of money charged for a product or a service.
More broadly, price is the sum of all the values that customers give up to gain the benefits of
having or using a product or service. Historically, price has been the major factor affecting buyer
choice. In recent decades, however, nonprice factors have gained increasing importance. Even
so, price remains one of the most important elements that determines a firm's market share and
profitability.
Price is the only element in the marketing mix that produces revenue; all other elements
represent costs. Price is also one of the most flexible marketing mix elements. Unlike product
features and channel commitments, prices can be changed quickly. At the same time, pricing is
the number one problem facing many marketing executives, and many companies do not handle
pricing well. Some managers view pricing as a big headache, preferring instead to focus on other
marketing mix elements. However, smart managers treat pricing as a key strategic tool for
creating and capturing customer value. Prices have a direct impact on a firm's bottom line. A
small percentage improvement in price can generate a large percentage increase in profitability.
More important, as part of a company's overall value proposition, price plays a key role in
creating customer value and building customer relationships.
AACSB: Analytical thinking; Written and oral communications
Skill: Concept
8) What sets the ceiling for product prices?
A) product manufacturing costs
B) sellers' perceptions of the product's value
C) customer perceptions of the product's value
D) variable costs
E) break-even volume
Answer: C
Skill: Concept
Objective: LO 10.2: Identify the three major pricing strategies and discuss the importance of
understanding customer-value perceptions, company costs, and competitor strategies when
setting prices.
Difficulty: Easy
3
9) What sets the floor for product prices?

A) consumer perceptions of the product's value
B) product costs
C) competitors' strategies
D) advertising budgets
E) market competition
Answer: B
Skill: Concept
setting prices.
Difficulty: Easy
10) Effective ________ pricing involves understanding how much value consumers place on the
benefits they receive from the product and setting a price that captures that value.
A) competition-oriented
B) cost-based
C) time-based
D) customer-oriented
E) marketer-oriented
Answer: D
Skill: Concept
setting prices.
Difficulty: Easy
11) ________ pricing uses buyers' perceptions of value as the key to pricing.
A) Customer value-based
B) Cost-based
C) Time-based
D) Markup
E) Target return
Answer: A
Skill: Concept
setting prices.
Difficulty: Easy
4
12) Which of the following is true of value-based pricing?

A) The targeted value and price drive decisions about what costs can be incurred and the
resulting product design.
B) Value-based pricing is mostly product driven.
C) Value-based pricing involves setting prices based on the costs of producing, distributing, and
selling the product plus a fair rate of return for its effort and risk.
D) The marketer usually designs a product and marketing program and then sets the price.
E) A company using value-based pricing designs what it considers to be a good product, adds up
the costs of making the product, and sets a price that covers costs plus a target profit.
Answer: A
Skill: Concept
setting prices.
13) Which of the following processes does value-based pricing reverse?
A) high-low pricing
B) everyday low pricing
C) cost-based pricing
D) good-value pricing
E) value-added pricing
Answer: C
Skill: Concept
setting prices.
Difficulty: Easy
5
14) A pharmaceutical company in Utah recently released a new and expensive anti-ulcer drug in
the market. The company justifies the high price of the drug by claiming that it is highly
effective for treating all kinds of ulcers. The company also claims that the new drug will help
bring down the need for invasive surgeries, an additional benefit for patients. Which of the
following pricing strategies is the pharmaceutical company most likely using in this instance?
A) target pricing
B) markup pricing
D) value-based pricing
E) break-even pricing
Answer: D
Skill: Application
setting prices.
Difficulty: Challenging
15) The perceived value of different product offers can be reasonably assessed by ________.
A) conducting a SWOT analysis
B) preparing demand curves
C) conducting surveys and experiments
D) collecting data about competitors' offers
E) setting a benchmark for product quality
Answer: C
Skill: Concept
setting prices.
Difficulty: Easy
16) Underpriced products ________.
A) produce less revenue than they would if they were priced at the level of perceived value
B) sell poorly in the global marketplace
C) produce more revenue than they would if they were priced at the level of perceived value
D) mostly offer higher value than those with a high markup price
E) are characterized by rapidly declining demand
Answer: A
Skill: Concept
setting prices.
Difficulty: Easy
6
17) Which of the following involves introducing less-expensive versions of established, brand
name products?
A) markup pricing
B) good-value pricing
C) time-based pricing
D) cost-based pricing
E) target profit pricing
Answer: B
Skill: Concept
setting prices.
Difficulty: Easy
18) ________ pricing refers to offering just the right combination of quality and gratifying
service at a fair price.
A) Markup
B) Good-value
C) Cost-plus
D) Target profit
E) Break-even
Answer: B
Skill: Concept
setting prices.
Difficulty: Easy
19) When McDonald's and other fast food restaurants offer "value menu" items at surprisingly
low prices, they are most likely using ________ pricing.
A) break-even
B) target profit
C) good-value
D) cost-plus
E) target return
Answer: C
Skill: Concept
setting prices.
Difficulty: Easy
7
20) Azure Air, an airline company, offers attractive prices to customers with tighter budgets. A
no-frills airline, it charges for all other additional services, such as baggage handling and inflight refreshments. Which of the following best describes Azure Air's pricing method?
A) target profit pricing
D) break-even pricing
E) penetration pricing
Answer: B
Skill: Application
setting prices.
21) Retailers such as Costco and Walmart charge a constant, daily low price with few or no
temporary price discounts. This is an example of ________ pricing.
A) competition-based
B) everyday low
C) cost-plus
D) break-even
E) penetration
Answer: B
Skill: Concept
setting prices.
Difficulty: Easy
22) Bon Vivant offers an assortment of exclusive French wines at incredibly low prices. These
prices are neither limited-time offers nor special discounts, but represent the daily prices of
products sold by Bon Vivant. This reflects Bon Vivant's ________ pricing strategy.
A) everyday low
B) markup
C) penetration
D) break-even
E) cost-based
Answer: A
Skill: Application
setting prices.
8
23) ________ pricing involves charging higher prices on an everyday basis but running frequent
promotions to lower prices temporarily on selected items.
A) High-low
B) Everyday low
C) Cost-plus
D) Break-even
E) Penetration
Answer: A
Skill: Concept
setting prices.
Difficulty: Easy
24) Department stores such as Kohl's and Macy's practice high-low pricing by ________.
A) charging a constant, everyday low price
B) providing few or no temporary price discounts
C) increasing prices temporarily on select products
D) having frequent sale days for store credit-card holders
E) underpricing most consumer items
Answer: D
Skill: Concept
setting prices.
25) Companies that adopt value-added pricing ________.
A) consider value-added features as a fitting substitute for aggressive cost cutting
B) set incredibly low prices to meet competition
C) attach value-added features and services to differentiate their offers and support their higher
prices
D) overprice their products without any apparent justification
E) underprice their products and lower quality to boost demand in the short-run
Answer: C
Skill: Concept
setting prices.
Difficulty: Easy
9
26) Which of the following is true with regard to value-added pricing?

A) Companies that practice value-added pricing typically match the competition by cutting
prices.
B) Companies practicing value-added pricing differentiate their offers by attaching value-added
features to offerings that, in turn, justify higher prices.
C) The intrinsic value of products sold by companies practicing value-added pricing is far less
than their actual selling price.
D) Companies practicing value-added pricing primarily rely on cost differentiation.
E) Value-added pricing is the most suitable pricing strategy in pure monopolies.
Answer: B
Skill: Concept
setting prices.
27) In an effort to differentiate its offerings from its competitors, Pegasus Computers decided to
add an extra USB port in all its laptops besides providing a free pair of Delphi power bass
headphones with every Pegasus laptop. Although the additional features increased the price of
the laptops by $500, Pegasus was confident that the strategy would help boost demand for its
laptops substantially. This is an example of ________.
A) good-value pricing
B) markup pricing
C) break-even pricing
D) value-added pricing
E) cost-based pricing
Answer: D
Skill: Application
setting prices.
10
28) ________ involves setting prices based on the costs for producing, distributing, and selling
the product plus a fair rate of return for effort and risk.
A) Value-based pricing
B) Competition-based pricing
C) Cost-based pricing
D) Penetration pricing
E) Break-even pricing
Answer: C
Skill: Concept
setting prices.
Difficulty: Easy
29) Companies with lower costs ________.
A) specialize in selling products with value-added features
B) usually market products with inferior quality, thereby justifying the low selling price
C) can set lower prices that result in smaller margins but greater sales and profits
D) tend to overprice products owing to their monopolistic advantage
E) usually set higher prices that result in higher margins
Answer: C
Skill: Concept
setting prices.
30) A company must pay each month's bills for rent, heat, interest, and executive salaries
regardless of the company's level of output. This exemplifies its ________ costs.
A) overhead
B) variable
C) target
D) total
E) unit
Answer: A
Skill: Concept
setting prices.
11
31) Overhead costs ________ as the number of units produced increases.

A) decrease
B) increase steadily
C) fluctuate
D) remain the same
E) increase rapidly
Answer: D
Skill: Concept
setting prices.
Difficulty: Easy
32) Which of the following is most likely a fixed cost?
A) sales representative commissions
B) product distribution costs
C) manufacturing input costs
D) temporary worker salaries
E) facility rental payments
Answer: E
Skill: Concept
setting prices.
Difficulty: Easy
33) Fixed costs ________.
A) are costs that do not vary with production or sales level
B) vary directly with the level of production
C) decrease with accumulated production experience
D) are the sum of the overhead and variable costs for any given level of production
E) represent the annual costs of inputs incurred by a company
Answer: A
Skill: Concept
setting prices.
Difficulty: Easy
12
34) Costs that change with the level of production are referred to as ________.
A) fixed costs
B) variable costs
C) target costs
D) total costs
E) overhead costs
Answer: B
Skill: Concept
setting prices.
Difficulty: Easy
35) In 2011, the fixed costs of a company were $500,000, and its variable costs equaled
$150,000. In 2010, the company made an annual profit of $200,000. It has been predicted that,
despite a steady growth, the company's variable costs will likely equal $300,000 by 2013. The
total costs of the company in 2011 were ________.
A) $350,000
B) $450,000
C) $650,000
D) $800,000
E) $950,000
Answer: C
Skill: Application
setting prices.
36) The total production costs at Kellner Machine Works are $87,000 out of which $45,000
represent fixed costs. Which of the following is representative of the variable costs incurred by
the company?
A) $35,000
B) $42,000
C) $45,000
D) $87,000
E) $132,000
Answer: B
Skill: Application
setting prices.
13
37) The fixed cost in manufacturing a single LED monitor is $40 and the variable cost is $12. If
the company expects to manufacture 5,000 monitors, the total costs would be ________.
A) $60,000
B) $200,000
C) $260,000
D) $420,000
E) $500,000
Answer: C
Skill: Application
setting prices.
38) As production moves up, the average cost per unit decreases because ________.
A) variable costs decrease
B) of increasing diseconomies of scale
C) fixed costs are spread over more units
D) overhead costs decrease
E) revenue increases
Answer: C
Skill: Concept
setting prices.
14
39) A cell phone manufacturing firm produced 1,000 cell phones a day but believed that it could
reasonably step up production to 2,000 cell phones a day. Consequently, it built a larger plant and
installed efficient machinery and work arrangements to realize the projected output. Which of the
following can most likely be inferred from this information?
A) The unit cost of producing 2,000 cell phones per day would be twice that of the unit cost of
producing 1,000 units per day.
B) A production plant with the capacity of producing 5,000 cell phones a day would be most
efficient.
C) The unit cost of producing 2,000 cell phones per day would be lower than the unit cost of
producing 1,000 units per day.
D) A 2,000-capacity production plant would be less efficient because of increasing diseconomies
of scale.
E) The fixed costs of the firm are more likely to increase with the increase in output.
Answer: C
AACSB: Reflective thinking
Skill: Critical Thinking
setting prices.
40) The long-run average cost (LRAC) curve indicates the ________.
A) per unit cost of output in the long run
B) projected total production costs of competitors
C) variable costs incurred by a firm over time
D) fixed costs incurred by a firm over the long term
E) number of units the market will buy in a given time period, at different prices that might be
charged
Answer: A
Skill: Concept
setting prices.
Difficulty: Easy
15
41) The learning curve is representative of the ________.

A) per unit cost of output in the long run
B) drop in the average per-unit production cost that comes with accumulated production
experience
C) number of units the market will buy in a given time period, at different prices that might be
charged
D) total market demand resulting from different prices
E) per unit cost of output in the short run
Answer: B
Skill: Concept
setting prices.
Difficulty: Easy
42) As production workers become better organized and more familiar with equipment, the
average cost per unit tends to decrease with the ________.
A) increase in the diseconomies of scale
B) accumulated production experience
C) decrease in the economies of scale
D) increase in derived demand
E) increase in primary demand
Answer: B
Skill: Concept
setting prices.
Difficulty: Easy
43) With accumulated production experience and a higher volume of production, companies not
only become more efficient but also ________.
A) gain economies of scale
B) incur higher overhead costs
C) create derived demand in the market
D) spend more per unit of produced output
E) tend to routinely spend less on inputs
Answer: A
Skill: Concept
setting prices.
Difficulty: Easy
16
44) The experience curve reveals that ________.

A) repetition in production has no visible impact on production costs
B) repetition in production enhances efficiency
C) the average cost of production remains the same with accumulated production experience
D) repetition in production adds to the costs and thereby increases the prices of outputs
E) the average cost of production increases with accumulated production experience
Answer: B
Skill: Concept
setting prices.
45) A downward-sloping experience curve is indicative of ________.
A) the negative customer perception about a company's products
B) the falling demand for a company's products
C) the falling unit production cost of a company
D) the low quality of a company's products
E) slow and inadequate organizational learning
Answer: C
Skill: Concept
setting prices.
46) Which of the following is most likely a risk associated with experience-curve pricing?
A) High-volume production facilities are unable to meet demand.
B) New technology often leads to productivity problems.
C) Demand for the product fluctuates unpredictably.
D) Consumers tend to prefer new brands over established ones.
E) Aggressive pricing often gives a product a cheap image.
Answer: E
Skill: Concept
setting prices.
Difficulty: Easy
17
47) Experience-curve pricing assumes that ________.

A) competitors are weak and not willing to match price cuts
B) competitors are strong and invincible
C) aggressive pricing adversely affects product image
D) volume-based production slows down organizational learning
E) lower-cost technologies are almost always inferior
Answer: A
Skill: Concept
setting prices.
48) The simplest pricing method is ________ pricing.
A) value-based
B) fixed cost
C) cost-plus
D) target return
E) competition-based
Answer: C
Skill: Concept
setting prices.
Difficulty: Easy
49) Cost-plus pricing ________.
A) is a complex pricing method
B) involves pricing that accurately reflects production costs
C) involves adding a standard markup for profit
D) aims at breaking even on the costs of making and marketing a product
E) is a value-based pricing method
Answer: C
Skill: Concept
setting prices.
Difficulty: Easy
18
50) Lawyers, accountants, and other professionals typically price by adding a standard markup
for profit. This exemplifies ________.
A) target pricing
B) cost-plus pricing
C) value-based pricing
E) penetration pricing
Answer: B
Skill: Concept
setting prices.
Difficulty: Easy
51) Herbie Inc., a firm manufacturing sandwich makers, has fixed costs of $250,000, variable
costs of $20 per unit of output, and expected unit sales of 50,000 units. What is the unit cost of a
sandwich maker manufactured by Herbie?
A) $15
B) $25
C) $30
D) $50
E) $75
Answer: B
Skill: Application
setting prices.
52) Samsung Mobile plans to launch a new phone with a unit cost of $270 and wants to earn a 10
percent markup on its sales. Samsung's markup price is ________.
A) $275
B) $280
C) $295
D) $300
E) $335
Answer: D
Skill: Application
setting prices.
19
53) Why is markup pricing most likely impractical?

A) Calculating costs is complicated due to fluctuations.
B) By tying the price to cost, sellers oversimplify pricing.
C) When all firms in the industry use this pricing method, prices tend to be similar.
D) The method ignores demand and competitor prices.
E) With a standard markup, consumers know when they are being overcharged.
Answer: D
Skill: Concept
setting prices.
54) Why is markup pricing most likely popular?
A) Sellers are more certain about demand than about costs.
B) Markup pricing tends to maximize market competition.
C) Markup pricing affords buyers greater bargaining power.
D) Sellers do not need to make frequent adjustments as demand changes.
E) Markup pricing is designed to set prices to break even on the costs of making and marketing a
product.
Answer: D
Skill: Concept
setting prices.
55) Which of the following is a cost-based approach to pricing?
A) value-based pricing
B) high-low pricing
C) target return pricing
D) good value pricing
E) EDLP
Answer: C
Skill: Concept
setting prices.
Difficulty: Easy
20
56) Target return pricing is a variation of which of the following cost-oriented pricing
approaches?
A) cost-plus pricing
B) break-even pricing
C) markup pricing
D) value-based pricing
E) fixed cost pricing
Answer: B
Skill: Concept
setting prices.
Difficulty: Easy
57) Target return pricing uses the concept of a(n) ________, which shows the total cost and total
revenue expected at different sales volume levels.
A) BCG matrix
B) break-even chart
C) SWOT analysis
D) demand curve
E) experience curve
Answer: B
Skill: Concept
setting prices.
Difficulty: Easy
58) John assured his venture capitalists an earning of 25-percent return on equity when he began
his IT startup. In order to achieve this result, he will most likely use which of the following
pricing approaches?
A) value-based pricing
B) markup pricing
C) EDLP
D) customer-based pricing
E) target return pricing
Answer: E
Skill: Application
setting prices.
21
59) The break-even volume is the point at which ________.

A) the total revenue and total cost curves intersect
B) demand equals supply
C) the production of one more unit will not lead to increase in demand
D) the company can pay off all its long-term debt
E) a firm exceeds the sales forecast
Answer: A
Skill: Concept
setting prices.
60) Which of the following statements about break-even analysis is true?
A) It is used to determine how much production experience a company must have in order to
achieve desired efficiencies.
B) It is a technique used to calculate fixed costs.
C) It determines the amount of retained earnings a company will have during a given accounting
period.
D) It is a technique marketers use to determine the relationship between supply and demand.
E) It is calculated by using variable costs, the unit price, and fixed costs.
Answer: E
Skill: Concept
setting prices.
61) A company faces fixed costs of $100,000 and variable costs of $8 per unit. It plans to directly
sell its product in the market for $12. How many units must it produce and sell to break even?
A) 20,000
B) 25,000
C) 30,000
D) 35,000
E) 40,000
Answer: B
Skill: Application
setting prices.
22
62) As a manufacturer increases the price, ________.

A) efficiency drops
B) the break-even volume drops
C) competition is minimized
D) the total costs increase
E) the profit margin shrinks
Answer: B
Skill: Concept
setting prices.
Difficulty: Easy
63) Mansfield Pharmaceuticals markets Zipro, an antibiotic. The firm has fixed costs of
$1,000,000 and variable costs of $2 per bottle of 50 tablets priced at $10 per bottle. What is the
break-even volume?
A) 25,000
B) 55,000
C) 100,000
D) 115,000
E) 125,000
Answer: E
Skill: Application
setting prices.
64) A manufacturer has fixed costs of $100,000, a variable cost of $10 per unit of output, and
break-even volume of 50,000 units. What should the manufacturer's unit cost be in order to break
even?
A) $10
B) $12
C) $14
D) $16
E) $20
Answer: B
Skill: Application
setting prices.
23
65) Which of the following involves setting prices based on a rival firm's strategies, costs, prices,
and market offerings?
A) target return pricing
C) competitor value-added pricing
D) market-based pricing
E) competition-based pricing
Answer: E
Skill: Concept
setting prices.
Difficulty: Easy
66) Companies can legitimately charge a higher price if ________.
A) consumers perceive that the company's product offers greater value
B) the demand for products manufactured by a firm is highly elastic
C) the cost of advertising is minimal
D) derived demand remains constant
E) consumers de-emphasize quality
Answer: A
Skill: Concept
setting prices.
24
Refer to the scenario below to answer the following question(s).

Alden Manufacturing produces small kitchen appliancesblenders, hand mixers, and electric
skilletsunder the brand name First Generation. Alden attempts to target newlyweds and firsttime home buyers with this brand.
Considering that most young households have limited financial resources, Alden attempts to
engage in target costing. "In doing this," says Milt Alden, the co-founder of Alden Electronics,
"we have better control over keeping price right in line with customers."
Alden manufactures a three-speed blender, its top seller, along with a five-speed blender. The
hand mixers are manufactured in two variantsa small handheld mixer with two rotating beaters
and another that comes with an optional stand and an attached mixing bowl. Alden's temperaturecontrolled skillets are manufactured in a single style with three color options.
"Our product offerings are narrower," Milt Alden added, "but our line workers know each
product like the back of their hands. This allows us to produce superior products while holding
our prices low.
67) Milt Alden says that his line workers "know each product like the back of their hands," and
that this knowledge helps the company keep its prices low. This indicates that Alden
Manufacturing most likely benefits from the ________.
A) cost-plus pricing
B) value-added pricing
C) experience curve
D) inelastic demand in the market
E) derived demand in the market
Answer: C
Skill: Application
setting prices.
68) Customer perceptions of the product's value set the floor for prices.
Answer: FALSE
Skill: Concept
setting prices.
Difficulty: Easy
25
69) Product costs set the ceiling for prices.

Answer: FALSE
Skill: Concept
setting prices.
Difficulty: Easy
70) In customer value-based pricing, price is considered along with all other marketing mix
variables before the marketing program is set.
Answer: TRUE
Skill: Concept
setting prices.
71) Value-based pricing uses the sellers' perception of value as the key to pricing.
Answer: FALSE
Skill: Concept
setting prices.
Difficulty: Easy
72) Using value-based pricing, a marketer would not design a product and marketing program
before setting the price.
Answer: TRUE
Skill: Application
setting prices.
73) Cost-based pricing is often product driven.
Answer: TRUE
Skill: Concept
setting prices.
Difficulty: Easy
26
74) Department stores that practice everyday low pricing typically provide frequent sale days,
early-bird savings, and bonus earnings for store credit-card holders.
Answer: FALSE
Skill: Concept
setting prices.
75) Overhead costs are costs that do not vary with production or sales level.
Answer: TRUE
Skill: Concept
setting prices.
Difficulty: Easy
76) Cost-based pricing involves setting prices based on consumer perception of value.
Answer: FALSE
Skill: Concept
setting prices.
Difficulty: Easy
77) Average cost tends to increase with accumulated production experience.
Answer: FALSE
Skill: Concept
setting prices.
Difficulty: Easy
78) A downward-sloping experience curve is indicative of a company's rapidly increasing
production costs.
Answer: FALSE
Skill: Concept
setting prices.
Difficulty: Easy
27
79) The simplest pricing method is cost-plus pricing, which involves adding a standard markup
to the cost of the product.
Answer: TRUE
Skill: Concept
setting prices.
Difficulty: Easy
80) Markup pricing is popular because when all firms in the industry use this pricing method,
prices tend to be similar, so price competition is minimized.
Answer: TRUE
Skill: Concept
setting prices.
Difficulty: Easy
81) Markup pricing is used when a firm tries to determine the price at which it will break even or
make the target return it is seeking.
Answer: FALSE
Skill: Concept
setting prices.
Difficulty: Easy
82) A break-even chart shows the total cost and total revenue expected at various sales volume
levels.
Answer: TRUE
Skill: Concept
setting prices.
Difficulty: Easy
83) Explain the concept of the price floor.
Answer: Price floor represents the price below which there is no profit.
AACSB: Written and oral communication
Skill: Concept
setting prices.
Difficulty: Easy
28
84) Explain the concept of the price ceiling.

Answer: Price ceiling represents the price above which there is no demand.
Skill: Concept
setting prices.
Difficulty: Easy
85) Briefly describe the process of value-based pricing.
Answer: The company first assesses customer needs and value perceptions. It then sets its target
price based on customer perceptions of value. The targeted value and price drive decisions about
what costs can be incurred and the resulting product design. As a result, pricing begins with
analyzing consumer needs and value perceptions, and the price is set to match perceived value.
Skill: Concept
setting prices.
86) What is good-value pricing?
Answer: Good-value pricing refers to offering just the right combination of quality and good
service at a fair price.
Skill: Concept
setting prices.
Difficulty: Easy
87) What is high-low pricing?
Answer: High-low pricing involves charging higher prices on an everyday basis but running
frequent promotions to lower prices temporarily on selected items.
Skill: Concept
setting prices.
Difficulty: Easy
29
88) Define total costs.

Answer: Total costs are the sum of the fixed and variable costs for any given level of production.
Skill: Concept
setting prices.
Difficulty: Easy
89) Explain the significance of a downward-sloping experience curve.
Answer: If a downward-sloping experience curve exists, this is highly significant for the
company. Not only will the company's unit production cost fall, but it will fall faster if the
company makes and sells more during a given time period.
Skill: Concept
setting prices.
90) A marketer's fixed costs are $400,000. The variable cost is $16 per unit, and the price of the
product is $24 per unit. If the company wants to make a profit, how many units must it sell and at
what price?
Answer: If the company wants to make a profit, it must sell more than 50,000 units at $24 each.
Skill: Application
setting prices.
91) A marketer's fixed costs are $400,000, the variable cost is $16 per unit, and the price of the
product is $24 per unit. What is the company's break-even point in dollar sales?
Answer: The break-even point in dollar sales is $1,200,000.
Skill: Application
setting prices.
30
92) What is competition-based pricing?

Answer: Competition-based pricing refers to setting prices based on competitors' strategies,
prices, costs, and market offerings.
Skill: Concept
setting prices.
Difficulty: Easy
93) Distinguish between value-based pricing and cost-based pricing.
Answer: Customer value-based pricing uses buyers' perceptions of value as the key to pricing.
Value-based pricing means that the marketer cannot design a product and marketing program and
then set the price. Price is considered along with all other marketing mix variables before the
marketing program is set.
Although costs are an important consideration in setting prices, cost-based pricing is often
product driven. The company designs what it considers to be a good product, adds up the costs of
making the product, and sets a price that covers costs plus a target profit. Marketing must then
convince buyers that the product's value at that price justifies its purchase.
Skill: Concept
setting prices.
94) Explain break-even pricing.
Answer: Break-even pricing (target return pricing) refers to setting price to break even on the
costs of making and marketing a product, or setting price to make a target return. Target return
pricing uses the concept of a break-even chart, which shows the total cost and total revenue
expected at different sales volume levels.
Skill: Concept
setting prices.
31
95) Which of the following is an external factor that affects pricing decisions in a company?
A) the company's overall marketing strategy
B) the nature of the market
C) the organizational objectives of the company
D) elements of the company's marketing mix
E) the annual advertising budget of rival firms
Answer: B
Skill: Concept
Objective: LO 10.3: Identify and define the other important external and internal factors
affecting a firm's pricing decisions.
96) Which of the following is an internal factor that affects pricing decisions in a company?
A) the nature of the market
B) the degree of inflation in the economy
C) the overall marketing strategy of the company
D) the forces of demand and supply in the market
E) consumers' perception of value
Answer: C
Skill: Concept
97) Companies using target costing ________.
A) first design a new product and then determine its cost
B) tailor their products to be in line with the marketing mix
C) routinely neglect customer value considerations
D) avoid determining an ideal selling price until analyzing test market results
E) start with an ideal selling price and then target costs that will ensure that the price is met
Answer: E
Skill: Concept
32
98) Elmo Inc., a global conglomerate, designed the ElBrush, an electric toothbrush. Sensing
market demand for the electric toothbrush, Elmo started with an ideal selling price of $3 based
on customer value considerations and then targeted costs to ensure that the price was met. This
exemplifies ________.
A) competition-based pricing
B) cost-plus pricing
C) target costing
D) everyday low pricing
E) high-low pricing
Answer: C
Skill: Application
99) PoolPak produces climate-control systems for large swimming pools. The company's
customers are more concerned about service support for maintaining their systems than the initial
price of the product. PoolPak specializes in and differentiates itself through both cutting-edge
technologies used to build its high-value climate control systems as well as seamless quality
service. PoolPak's prices are very high, but demand for its climate-control systems seems to be
forever on the rise. This exemplifies ________.
A) target costing
B) a pure monopoly
C) cost-plus pricing
D) a nonprice position
E) break-even pricing
Answer: D
Skill: Application
33
100) DivetheBlue, a company marketing deep-sea diving equipment, charges very high prices for
its products. Despite the availability of many low-priced products in the market, customers seem
to prefer DivetheBlue, which has earned a reputation for selling high-quality products. This
exemplifies ________.
A) a pure monopoly
B) an oligopoly
C) a nonprice position
E) target costing
Answer: C
Skill: Application
101) A decision to position the product on high-performance quality will mean that the
________.
A) seller must charge a higher price to cover higher costs
B) seller must charge a lower price to attract more customers
C) producer must step down production
D) marketer must boost derived demand in the market
E) break-even volume will be fairly low
Answer: A
Skill: Concept
102) Price setting is usually determined by ________ in small companies.
A) the top managers
B) the marketing department
C) the sales department
D) divisional managers
E) product managers
Answer: A
Skill: Concept
Difficulty: Easy
34
103) Price setting is usually determined by ________ in large companies.

A) top managers
B) external stakeholders
C) product managers
D) non-executive employees
E) the sales department
Answer: C
Skill: Concept
Difficulty: Easy
104) In industrial markets, ________ typically has the final say in setting the pricing objectives
and policies of a company.
A) the sales manager
B) top management
C) the production manager
D) the HR department
E) the sales staff
Answer: B
Skill: Concept
Difficulty: Easy
105) In industries in which pricing is a key factor, ________ often set the best prices or help
others in setting them.
A) sales departments
B) salespeople
C) production managers
D) line managers
E) pricing departments
Answer: E
Skill: Concept
Difficulty: Easy
35
106) Under ________, the market consists of many buyers and sellers trading in a uniform
commodity.
A) pure competition
B) monopolistic competition
C) oligopolistic competition
D) a pure monopoly
E) the dominant firm model
Answer: A
Skill: Concept
Difficulty: Easy
107) Which of the following exemplifies a pure competitive market?
A) a market where many buyers and sellers trade over a range of prices rather than a single
market price
B) a market where a single firm controls the larger fraction of the market share
C) a market where a few powerful firms control the larger fraction of the market share
D) a market characterized by only a few large sellers
E) a market where many buyers and sellers trade in a uniform commodity
Answer: E
Skill: Concept
108) Which of the following is true of a pure competitive market?
A) A single seller has a major effect on the current and future market price.
B) Companies spend significantly on marketing research and product development.
C) The advertising budget of companies is usually huge.
D) Sellers try to develop differentiated offers for different customer segments.
E) Sellers spend little time on marketing strategy.
Answer: E
Skill: Concept
36
109) In Via del Mar, Chile, a large number of shops specialize in selling the same quality of
seafood products along the beach frequented by tourists. No individual shop dares charge more
than the going price without fearing loss of business to other shops. This exemplifies ________.
A) pure competition
D) pure monopoly
Answer: A
Skill: Application
110) Under ________, the market consists of many buyers and sellers who trade over a range of
prices rather than a single market price.
A) pure competition
D) a pure monopoly
Answer: B
Skill: Concept
Difficulty: Easy
111) Which of the following is true with regard to pure competition?
A) Under pure competition, no single buyer or seller has much effect on the going market price.
B) In a purely competitive market, marketing research is of utmost importance.
C) In a purely competitive market, product development is the focus of most firms.
D) Under pure competition, the market consists of many buyers and sellers who trade over a
range of prices rather than a single market price.
E) Under pure competition, the market consists of only a few large sellers.
Answer: A
Skill: Concept
37
112) The movie industry in a country is controlled by six large studios that receive 90 percent of
the annual revenues from movies. This is an example of a(n) ________.
A) pure competition
D) pure monopoly
E) government monopoly
Answer: C
Skill: Application
113) In which situation is the market dominated by one seller?
A) pure monopoly
D) pure competition
E) free market
Answer: A
Skill: Concept
Difficulty: Easy
114) Under oligopolistic competition ________.
A) the market consists of a single dominant seller
B) the market consists of numerous small sellers
C) the market consists of many buyers and sellers who trade over a range of prices rather than a
single market price
D) sellers are typically unresponsive to competitors' pricing strategies and marketing moves
E) the market consists of only a few large sellers
Answer: E
Skill: Concept
Difficulty: Easy
38
115) Which of the following shows the number of units the market will buy in a given time
period, at different prices that might be charged?
A) demand curve
B) supply curve
C) learning curve
E) target costing
Answer: A
Skill: Concept
Difficulty: Easy
116) Which of the following is true about the demand curve?
A) A demand curve indicates the drop in the average per-unit production cost that comes with
accumulated production experience.
B) A demand curve indicates the cost per unit of output in the long run.
C) A demand curve indicates the cost per unit of output in the short run.
D) In a monopoly, the demand curve does not indicate the total market demand resulting from
different prices.
E) A demand curve shows the number of units the market will buy in a given time period at
different prices that might be charged.
Answer: E
Skill: Concept
117) Bruno Servers has decided to decrease its prices on its popular higher-range servers. The
company can reasonably expect ________ to increase.
A) fixed costs
B) variable costs
C) demand
D) additional value
E) overhead costs
Answer: C
Skill: Application
39
118) ________ refers to a measure of the sensitivity of demand to changes in price.

A) Price elasticity
B) A demand curve
C) Price-value equation
D) Marginal utility
E) Income elasticity of demand
Answer: A
Skill: Concept
Difficulty: Easy
119) If demand hardly changes with a small change in price, the demand is ________.
A) variable
B) inelastic
C) highly elastic
D) derived
E) negative
Answer: B
Skill: Concept
Difficulty: Easy
120) If demand changes greatly with a small change in price, the demand is ________.
A) variable
B) inelastic
C) derived
D) elastic
E) negative
Answer: D
Skill: Concept
Difficulty: Easy
40
121) Dips in the economy and the instant price comparisons made possible by the Internet have
contributed to ________.
A) decreased consumer price sensitivity
B) increased consumer price sensitivity
C) a less direct relationship between supply and demand
D) low brand equity for luxury goods
E) decreased brand loyalty
Answer: B
AACSB: Information technology
Skill: Concept
122) In the aftermath of the Great Recession of 2008 to 2009, consumers ________.
A) have become more value conscious
B) have become less value conscious
C) exhibit great interest in prestige pricing
D) show no interest in price cutting
E) rarely endorse value-for-money deals
Answer: A
Skill: Concept
123) When companies set prices, the government and social concerns are ________ factors
affecting pricing decisions.
A) external
B) internal
C) economic
D) cultural
E) organizational
Answer: A
Skill: Concept
Difficulty: Easy
41
Refer to the scenario below to answer the following question(s).

Alden Manufacturing produces small kitchen appliancesblenders, hand mixers, and electric
skilletsunder the brand name First Generation. Alden attempts to target newlyweds and firsttime home buyers with this brand.
Considering that most young households have limited financial resources, Alden attempts to
engage in target costing. "In doing this," says Milt Alden, the co-founder of Alden Electronics,
"we have better control over keeping price right in line with customers."
Alden manufactures a three-speed blender, its top seller, along with a five-speed blender. The
hand mixers are manufactured in two variantsa small handheld mixer with two rotating beaters
and another that comes with an optional stand and an attached mixing bowl. Alden's temperaturecontrolled skillets are manufactured in a single style with three color options.
"Our product offerings are narrower," Milt Alden added, "but our line workers know each
product like the back of their hands. This allows us to produce superior products while holding
our prices low.
124) Milt Alden uses which of the following strategies for pricing his products?
A) basing company price on competitors' prices
B) using everyday low pricing
C) initiating an aggressive promotional campaign
D) starting with customer-value considerations
E) focusing on overall fixed costs of manufacturing
Answer: D
Skill: Application
125) If Milt Alden focuses on overall costs of manufacturing plus profit in setting product prices,
which strategy would he employ?
A) break-even pricing
B) competition-based pricing
C) value-added pricing
D) cost-plus pricing
E) good-value pricing
Answer: D
Skill: Application
42
126) Internal factors affecting pricing include the company's overall marketing strategy,
objectives, and marketing mix.
Answer: TRUE
Skill: Concept
Difficulty: Easy
127) Price decisions must be coordinated with product design, distribution, and promotion
decisions to form a consistent and effective integrated marketing mix program.
Answer: TRUE
Skill: Concept
Difficulty: Easy
128) In a pure monopoly, the market consists of many buyers and sellers who trade over a range
of prices rather than a single market price.
Answer: FALSE
Skill: Concept
Difficulty: Easy
129) A demand curve shows the number of units the market will buy in a given time period at
different prices that could be charged.
Answer: TRUE
Skill: Concept
Difficulty: Easy
130) If a company faces competition, its demand at different prices will depend on whether
competitors' prices stay constant or change with the company's own prices.
Answer: TRUE
Skill: Concept
43
131) If demand changes greatly with price, the demand is inelastic.

Answer: FALSE
Skill: Concept
Difficulty: Easy
132) The more elastic the demand, the more it pays for the seller to raise the price.
Answer: FALSE
Skill: Concept
133) If demand is elastic rather than inelastic, sellers will consider lowering their prices.
Answer: TRUE
Skill: Concept
134) Who typically sets prices in large and small companies?
Answer: In small companies, prices are often set by top management rather than by the
marketing or sales departments. In large companies, pricing is typically handled by divisional or
product managers.
Skill: Concept
Difficulty: Easy
135) What is a pure monopoly?
Answer: In a pure monopoly, the market is dominated by one seller. The seller may be a
government monopoly, a private regulated monopoly, or a private unregulated monopoly. Pricing
is handled differently in each case.
Skill: Concept
Difficulty: Easy
44
136) What are the different internal factors that affect a firm's pricing decisions?
Answer: Beyond customer value perceptions, costs, and competitor strategies, the company
must consider several additional internal and external factors. Internal factors affecting pricing
include the company's overall marketing strategy, objectives, and marketing mix, as well as other
organizational considerations. Price is only one element of the company's broader marketing
strategy. If the company has selected its target market and positioning carefully, then its
marketing mix strategy, including price, will be fairly straightforward. Some companies position
their products on price and then tailor other marketing mix decisions to the prices they want to
charge. Other companies deemphasize price and use other marketing mix tools to create nonprice
positions.
Skill: Concept
137) Compare and contrast pure competition and oligopolistic competition.
Answer: Under pure competition, the market consists of many buyers and sellers trading in a
uniform commodity, such as wheat, copper, or financial securities. No single buyer or seller has
much effect on the going market price. In a purely competitive market, marketing research,
product development, pricing, advertising, and sales promotion play little or no role. Thus,
sellers in these markets do not spend much time on marketing strategy.
On the other hand, under oligopolistic competition, the market consists of only a few large
sellers. Because there are few sellers, each seller is alert and responsive to competitors' pricing
strategies and marketing moves.
Skill: Synthesis
138) Briefly discuss monopolistic competition.
Answer: Under monopolistic competition, the market consists of many buyers and sellers who
trade over a range of prices rather than a single market price. A range of prices occurs because
sellers can differentiate their offers to buyers. Because there are many competitors, each firm is
less affected by competitors' pricing strategies than in oligopolistic markets. Sellers try to
develop differentiated offers for different customer segments and, in addition to price, freely use
branding, advertising, and personal selling to set their offers apart.
Skill: Concept
45
139) What is a demand curve? Explain its importance in the context of pricing decisions.
Answer: A demand curve shows the number of units the market will buy in a given time period,
at different prices that might be charged. Each price the company might charge will lead to a
different level of demand. The relationship between the price charged and the resulting demand
level is shown in the demand curve. In the normal case, demand and price are inversely related
that is, the higher the price, the lower the demand. Thus, the company would sell less if it raised
its price from P1 to P2. In short, consumers with limited budgets probably will buy less of
something if its price is too high. Understanding a brand's price-demand curve is crucial to good
pricing decisions. Most companies try to measure their demand curves by estimating demand at
different prices. The type of market makes a difference. In a monopoly, the demand curve shows
the total market demand resulting from different prices. If the company faces competition, its
demand at different prices will depend on whether competitors' prices stay constant or change
with the company's own prices.
Skill: Concept
140) Explain price elasticity. What determines the elasticity of demand?
Answer: Price elasticity refers to a measure of the sensitivity of demand to changes in price. If
demand hardly changes with a small change in price, the demand is inelastic. If demand changes
greatly, it is elastic.
If demand is elastic rather than inelastic, sellers will consider lowering their prices. A lower price
will produce more total revenue. This practice makes sense as long as the extra costs of
producing and selling more do not exceed the extra revenue. At the same time, most firms want
to avoid pricing that turns their products into commodities. In recent years, forces such as
deregulation and the instant price comparisons afforded by the Internet and other technologies
have increased consumer price sensitivity, turning products ranging from telephones and
computers to new automobiles into commodities in some consumers' eyes.
AACSB: Analytical thinking; Written and oral communications
Skill: Concept
46
141) Briefly describe how economic conditions impact a firm's pricing strategies.
Answer: Economic conditions can have a strong impact on a firm's pricing strategies. Economic
factors such as a boom or recession, inflation, and interest rates affect pricing decisions because
they affect consumer spending, consumer perceptions of the product's price and value, and the
company's costs of producing and selling a product.
In the aftermath of the recent Great Recession of 2008 to 2009, many consumers have rethought
the price-value equation. They have tightened their belts and become more value conscious.
Consumers will likely continue their thriftier ways well beyond any economic recovery. As a
result, many marketers have increased their emphasis on value-for-the-money pricing strategies.
The most obvious response to the new economic realities is to cut prices and offer discounts.
Thousands of companies have done just that. Lower prices make products more affordable and
help spur short-term sales. However, such price cuts can have undesirable long-term
consequences. Lower prices mean lower margins. Deep discounts may cheapen a brand in
consumers' eyes. And once a company cuts prices, it is difficult to raise them again when the
economy recovers.
Skill: Concept
142) "Beyond the market and the economy, the company must consider several other factors in
its external environment when setting prices." Explain this statement.
Answer: Beyond the market and the economy, the company must consider several other factors
in its external environment when setting prices. It must know what impact its prices will have on
other parties in its environment. How will resellers react to various prices? The company should
set prices that give resellers a fair profit, encourage their support, and help them to sell the
product effectively. The government is another important external influence on pricing decisions.
Finally, social concerns may need to be taken into account. In setting prices, a company's shortterm sales, market share, and profit goals may need to be tempered by broader societal
considerations.
Skill: Concept
47

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Principles of Marketing, 16e (Kotler)

Chapter 10 Pricing: Understanding and Capturing Customer Value

4) Prices have a direct impact on a firm's bottom line.

7) Define price. Discuss its importance.

9) What sets the floor for product prices?

12) Which of the following is true of value-based pricing?

26) Which of the following is true with regard to value-added pricing?

31) Overhead costs ________ as the number of units produced increases.

41) The learning curve is representative of the ________.

44) The experience curve reveals that ________.

47) Experience-curve pricing assumes that ________.

53) Why is markup pricing most likely impractical?

59) The break-even volume is the point at which ________.

62) As a manufacturer increases the price, ________.

Refer to the scenario below to answer the following question(s).

69) Product costs set the ceiling for prices.

84) Explain the concept of the price ceiling.

88) Define total costs.

92) What is competition-based pricing?

103) Price setting is usually determined by ________ in large companies.

118) ________ refers to a measure of the sensitivity of demand to changes in price.

Refer to the scenario below to answer the following question(s).

131) If demand changes greatly with price, the demand is inelastic.

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