PRICING

8 PRACTICES - 11

8.1 Introduction
S.2 . Marginal Cost Pricing
v'
~~3 Cost Plus Pricing
J,4 M'ultiple - Product Pricing
~8.s' Tran sf er Pricing
8.6 Case Studies

Price of a commodity is determined in the market by the

demand and market supply. In previous chapters, equili ·
firm and industry where we have discussed that, a _firm pr
an equilibrium output where its MC= MR. The price is equal
corresponding point on AR, that is price = AR. Under
competition, a firm being a price taker, its Price = AR =MC •
ln markets other than perfect competition, firms face do
sloping demand curve. The slope of the curve depends Clll
strength of the demand for what it sells. In monopolistic com
many firms exist and commodities are differentiated. Each fi1lll
ha ve ~ome influen.ce on the price, yet due to the existence rJ
subst1t~ tes a firm cannot charge a much higher price t
compet~t?rs. TI1e demand curve faced by a fir m in a m~ .
competitive market i~ elastic. In an oligopoly m arket, pnce •
and very often non-pn ce competition takes p.lace. In theor)', tht
charged is equal to the average cost, so tha t a firm can earn a
 1
·ces . 11 127
·~g Prl' '
1 0
ding on cost and demand H can be higher than the
_1'fli . or dtf1C abling the fi rm to earn excess profit. In the short run
,f,t ~ten
t f'v" required to c arge a pnce less than the average cost,
h .
,vt~ cr.'Y be ain in the market.
,,,... to retJl
~~ howevfr, price charged ma_y_not be as per theoretical
. , , ., t us discuss some of the pncmg methods foJiowed by
(11 r ,.Jl. Le
r~i,e1r- ✓.,..,
tltt fitd"' - ,,..,,,.,,,.,,,,1,, /' ,,,,,.,.,.-,, ,,,,.,,,,,,,,.,,.,.,_w•;,:;,;q,,,,.,,,?w¥0',W•·•w P,<f;,,,,,_,.,,~• .,,,,,,,,,.7,,,,,1,.,_.,,,,,,.,,,_,,. ,-•~,;:,--~-- ._,.,_A,, "I'

AL COST PRICING ~
'

otic analysis relies upon marginal cost and marginal

1. Ec:ue analysis for determining the equilibrium output. The
re:nibrium output is at the point where MC= MR. The price is
:termined by the corresponding point on the demand line
(AR) which may be= or> or< than the average cost.
public undertakings for various reasons may follow a price
~ based on the marginal cost. Figure 8.1 explains the price
i,ased on marginal cost.

DI

Ql Q2 . Q X

Output
Fig. 8.1
 1
R11si11c~s l.: nmotnics ~ I{ (I , y
1..8 , _ , .H.r_o . .
. . 81 e,plains the pnce based on MC anJ al . 117 · )f ·¼.
Figut~ · . ·e 1'11ual to AC. Givrn the demand DD so th t'. r..-, .
fharg1ng pnl , , . h i, 0Q )''It
.. ·:1 and sold at 01l\ price w . ere 001 cu ts Ac
l'"'"'
tUl:C\ d' I f. .
i ' >1i
cl t p ~-,
price the total cost indu ing norma pro it is covered. ~n-,~·/\t
11), .

equal t·o AC. Ptrc_

Publi(' undertakings producing essential public goods rn ;
·h roPa lower price equal. tobMC. The lower
d
price W'll hay dr
av
to c a.o- OQ l
..a ....mand Now the output wil1 e 2, an sold at Q p _ . ern
C AI h 2 2 Price
DD, cut's MC. Here pric~ • ~ . ~ss tot e extent of P2N vv
Ut:' •

. incurred. The commodity ts supplied at a lower price in th ~er

: public welfare and accordingly the loss is met by the go elnte
. vernrn
Commodities like water, kerosene, coo k1ng gas are sorn
examples. If the people ar~ ~ble _and willing to pay more aen~f
demand more quantity at pnce higher than Q2P2, that is, in dia
8.1,0Qquantity a!QPprice, then optimum ou~ut _(OQ) is prod~
and sold at OP pnce, equal to AC = MC, earning a normal profi
lnca&l\ a public undertaking decides to produce commodities w
are mainly purchased by higher income group such as mineral wa
petrol, servites like air tr~vel etc. and the demand is assumed to
~ \lip as shown by DO2 in diagram 8.1, the·price can
eqal or~ than AC. With DO2 demand, OQ3 quantity
ptodm!dand soldatQ3P,_pricewhere DO2 cuts MC, earningexc
profit of Id\ per unit. It is possible, in this case too, to prod
JDOl!tatalo\ver price, that is, ~P4 which is equal to AC and e
nonulpqfit. AtQ. output people are not willing to pay Q4Rip
whichi&ejialto MC but laf&her than AC by P4R2. In this case wh
thea,•A8Jtr, not~, i~ is advisable to charge a price eq
to MC> N:.. ear.n profit~ can be spent for providing m.
dotba- r 1,t,!~an.d~. .
'
..,,..,.,tJ.mlJP!II '!oat-pricing
.

J.

....
Tone,1111,

Pie, &2
~-
A1.t1tla•te-= the price charged by a mon
ea price based on marginal c
· al c·
,..WII.,.. of Dl\llOpoly price on margin,
~

..
~pertbe
, ll,twould produce OQ outpi~,P iiri
by the demand) and charge ·.
t (,1hll
 . p,ri,t;,-es - 11 . 129
,rj • t the government introduces the price reguJat·ion an d
r·ff,-1t,il -,ottl , h. h .
1c 1s equa1 to
i\t t
.,-
prt·ce at OT w . MC = AR, at a Jar ger output
·.....~ ttae ON is sold at a constant pnce OT= NS the firm 's TR now
1 . , ~...-1.e AS part of the demand line (AR) becomes ure
1
· 1ev ant
O~D
at a constant price or · The opera 0. ve
11,1 •
. 1~_:. pp.a1
output ON 1s sold
.
15
,s tl18 tlte demand curve is TSD, however prices will not be reduced
~rJ dUl" OT. The rel~vant ~ c~rve i~ TSUM, with TS part is
to JeS' AR and SU portion being discontinuous. Production more
equal;, and price greater than OT will not be possible as MC> w1R
tJtat' ..11 . t,eyond ON.
a11d JVN
y
A

o-----~Q- --1r------- -.x

Output

M
Fig. 8.2

ted price OT in Fig. 8.2 is less than monopoly market

P· The monopolist in the absence of regulation would have
red- -output to OQ, charged higher price OP. With regulation,
prod• ~ is more and price is lower i.e. Price = AR = MC.
- ·------•#,_., .,. ~ , .. • . .
US PRICING
It~11 I that, price of a commodity should cover the cost of
L of the good and also bring a fair amount c_:,f profit. tvta:°y
' - . enterprises have the idea that the appropriate sales pnce

,-J
lJO Business Economics - 11 (F.Y.B .
. . -Co,.n.: S£,
is the sun, of all costs plus the pro~1t which will yield t ~
return on capital employed. Under this method which is he
Plus Pricing OR Mar k -UP Pricing ca1lett ,
. . " t he f.u m first esurn
average variable cost (AVC) and adds the average overh atea
(usually estimated as a percentage of AVC) to obtain fulleadc
average cost (Aq. For this Ac; the firm adds up a marky a11
cost for earning profits. The following formula explains rn~~~
cost:
P-C
m=
C
Where, m = Mark upon cost
p = Product Price
C = Fully allocated average cost
Here P-C is the profit margin.
From the above equation we ~an derive the price of 9 co
from the cost plus pricing method. The price of the product
P=C(l+M)
Let us explain with an example :
Full capacity output 12,500
80% Output (normal output) 10,000
Total Variable cost '1,00,000
Overhead cost f 60,000
Mark-up 25 percent
From the above, the AV •, 10
Average overhead cost, 6
The allocated full coat is 10 +6 • 16.
P • 16 (1 + 0.25) • 20

~6--'- • ('20 - ,16\ .

LYIAfJL•Up 18 - - - ~ ' -
'16 . i.e. 25%.
025.
 p,,ctict5 M II
131
1riK. differ in their mark-up. Besides it d
~\'ir <>J Ulle nt including the interest ra~peo<ls on prev aiJing
et efl e.
a,re hoWever, se~eral vari eties of full cost ricin
g methods.
differ on the basis of working out the cost ~d the
,od percentage of mark-up. types of

ir►, • . 1
dolll: The full cost pricing method though SIIllp
. ~ haS some limitations. e and more

1'he method ignores demand. Price is worked out assumin g

1) sufficient demand.

ri) ooes not consider competition. However, the mark-up ·

success
percentage depends on the degree of competition and
in ~ g such competition.
It
, iii) l)ifficult to work out the average cost in a precise manner.
will be more so if a firm produces more than one product.
~i~, iv) Dilfieu!t to classify the cost in different categories. At times it
n~ bttomeS very difficult to distinguish between overhead and
vadable cost.

ot withstanding the difficulties associated with this meth

od, it is
BUJre ,epu lar among the business enterprises. The reasons are :-
i) It ii the classical method of charging a price for a commodity.
It ii also a logical way of maximising long-run profit.
ii) It is an ideal which the firms aim at. Covering the cost of
p.mduction and earning a certain predetermined percentage of
pdit should be the· objective even if it could not be fully
-'ie ved.
(iii) Ptice based on cost of production are considered fair
for
_.ucers as well as consumers.
.
(iv) la CO&t pricing method can avoid freq~ent ~hange~ in price
t:::; do not appreciate changes m pnces which occur

j
 l3 2
~
Hu sincss r co1101111cs. If rt.Y.B C
. t l . . . o,n . s
l' ) l n t·P cl l tty marKe · ts uncertam and know}pd . . ·· · f.
1n aking the tnarket imperfect. Under th es! e ~s 1nccJ
bu~incss people prefer a stable price based on ( curos
/
tu 1
1

COsl
\,.,

· s.t MULTIPLE-PRoouCT PlUCiNG'"

A con1pany produces inter-related products in the form of su .
or complementary goods. When such goods are produ bs
nee4s to consider the effect of a change in the price of 0 ~ed a
the _other comn1odity. _For example Godrej or HindustaneJ
"which produces a van ety of soaps, must consider the im
change i~ the price of one brand on the other. Pact.
Product line pricing is· a pricing strategy that uses various
d istinctions. An example would be a car model that has v
model types that change with performance and quality. This
is evaluated through consumer value perception, cost of prod
cost of upgradation and demand factors.

We have firms manufacturing cars, garments, household i

wh ich manufacture either substitutes or complementary
Proctor and Gamble is an example of a company producing an
of products. Firms which produce a number of in~er-related p
(product line or multiproducts) require to work out a strat
price their different products.
' .
The demand inter-relations between the two commodities
explained w ith the help of Marginal Revenue functions,

_ dTRA dTR 8
MR A - ----- + -----
dQA dQA

MRs • dTRs + dTRA

dQe dQs

where A and Bare the two products. Marginal revenue of a ~~r

has two c?mponents i.e. one is a change in the total re~~ 1;~:oe·
a change 1n the sale of the same product and the other is ·
 ~ .11 1.11
.-:w:f'f""-- ge in to ta l rev e nu e f r o 1n th e sa le of th
. ·•ttt't'/dt'~1 l'e t.X}ua tion 8.1d (dTRs- / dQA) measu res th.e eeffect
other
on
tl'
llJ• :.:.venue fron1 pro u ct 8 lresulti ng from the s 1 f
o a, .... - prod uc t A . s·1n11·1 ar y 1n . a e o an
, 1t111 .,ut of equati on 8.2 (dTR / dQ
fitt'lflll11W effect on the firm_'~ total revenu e from produc t ,X
;::fJOfll the sale of an add1t1 0nal unit of produc t B.

r,lfl/tof the right side of the equati on is p ositive, that is if th

' et••">f comm odity B (dTR 8 ) increa ses due to an increas e ;
I ~;_.tte two comm oditie s are compl ementa ry. In other w ords
,4., • the sale of A leads to additio nal deman d for B thus
tin8ilen increa se in total revenu e from t~e increas e in deman d
B.
the_.. of the righ~ side of the equ~ti.on _is negative, then the
--~ are substi tutes. Here additi onal sale of
A reduce s
- 11 I I•

flllaDU P' B-
ad' •telati onship
ucts are produ ced in variab le propor tions for a numbe r
service s. For examp le, in the refinin g proces s of crude
:produ cts like petrol , diesel, hea_ting oil are produc ed in
IIOl)orti ons. The cost of produc tion and supply of a by-
ds on the deman d for other goods. By-pro ducts are
unatlflable result of produ cing certain goods.
r npt·■ ,' outpu t and pricin g decisio ns, the _firm require s to take
to c IA leratio n the total ·effect , that is direct as well as cross
_gi. . '\2£feet. Failur e to do this may result in excess or sub-
. produ ction. If the cross effect is not taken into accoun t,
~ produ ce a comm odity A upto the point w here dTRA/
A • lfcA, which is not optim um outpu t/ price decisio n. \Vhen
Ob W◄mnand interd epend ency, the profit m axim isation output
..la at apoin t.

_ dTRA dTR 8
dQA + dQA ; MC A
134 /!usine.,s Economics • I[ (F,Y.B
.,. .om.: St
~
Productj on and Price

lf a finn prod uces three goods, A, B ~nd C, their total prod , .

dctennined at a point where MC = l:MR. Ucti

!:l\1R is the co1nbined 1narginal revenue.

TI1e firm maximises profit by distributing its total output wh
· c.
= 1v1R8 = MRc = M ~

Price will be charged on the basis of demand which differs fo

commodity. Appropriat~ pricing_ and production decisio~
possible only when such interrelations are accurately reflec•~
✓ ~.
r-·~,-~"S•~~•,,."."•'-•··•=<•M• •:·~•• .. ,•~<'>'C~••oS.,••:•»<(.-== ••1">-~,->,•~-v•,>)<c ,~·t~'.''f7<'~/<,",
t 8.5 TRANSFER
•'• . PRICJN
.
.'·; .·, .. . . . .
> •
.
•• •••

Large multi-product firms are often divided ui:iit smaller uni

departments in order to avoid diseconomies of large sc
production. Generally each unit or department is made a
centre. Though these units and departments function independ
they also transact with each other and therefore play .a role in
overall functioning of the large firm they belong to. For ex
TATA Consultan~y-Service (TCS) sells its services to other T~
firms like TATA Motors or TATA Steel. Such transactions
different units of the same conglomerate or between dep•'!ll,..., 11
..-

of the same firm are carried out at prices known as transfer.p ·

Thus, a transfer price is the price at which divisions of a com

transact with each other. Transfer prices are used when indivi
units of a larger firm are treated and measured as separ
managed entities. A transfer price can also be termed as a tr
cost.

Transfer price involves certain managerial strategies:

(a) Different divisions or profit units of a company are res

of their own profits and their own return on invested ca
(ROIC). Therefore, when they are required to transact with
other~ a transfer price is used to determine costs. The

1. Mark Hirschey .. Manageri,11 Econom ics

 135
, ' Ml(; - II
p11't1C: h,'-' goods and
I';~$ d by one depa rtment or un it w~ile sel ling
generates revenue
,i,arf to one department of the same f1rm ine s the cost of the
se~•l~cpartment that sells, while Hdeterm
to tlietment that pu rchases. Therefore tran
sfer prices should be
interest of ea.ch
Jef"':mined in such a mann er as to pro tect the
Jelf ting department.
transac
the marke t
fer prices usually do not differ much from
e, then one of the
) fr~ : of the products. If that is not the cas
as it would
1'11;: involved in the transaction might los e out rke
uJU e to buy resources at a price higher tha
n the ma t price or
cess of inter-
ha;at a price .lower than the market price in the pro
se
fil1Jl transactions.
avoid taxes. One of
) Attunes, firms may use transfer pricing to
used is when
the most common types of transfer _pricing
to subsidiaries
companies sell goods within the same group but
in other countries. It is estimated that
approximately 60% of
done within
the goods and services sold internationally are
h transfer pricing
· subsidiaries of the same company. Suc
e advantage of
strategies have tax advantage . Companies tak
through transfer
the different tax policies in different countries
panies can book
pricing. When transfer pricing occurs, com
ntry that may
profits on goods and services in a different cou
sfer of goods and
have a lower tax rate. In some cases, the tran
an interrelated
services from one country to another within
to avoid tariffs on
(Olltpany transaction can allow a company
. For example, a
pods and services exchanged internationally
ntry has the option
maltinational manufacturer of steel in a cou
ng in or from its
d'buying iron ore from the country it is operati
y on iron ore in
own subsidiary in another country. If excise dut
r will import
lower in the other country, then the manufacture price for
her
iron ore from its subsidiary rather than pay hig g paying
idin
~ iron ore. In effect the manufacturer is avo rating in.
ope
~ excise duty on iron ore in the country it isable position
'Dt1s will place the manufacturer in aSuc favour
rs. h tax avoida nce is
Q§ :fpared to other local manufacture
refore, transfer
lllonitored and regulated in every country. The
Prldng is regulated by the government.
 · • .c·
,. D11~i11c;;~ C:cot10111h s - II (J ' y /l
1.1t, o,,,.: sr ·
c· h.11'\c.fer r1ricing affects the profits of eJrh unit inv 1V('d,\f.
~tll<. l .
_l
C .. . . • ()

thl'refore that of the larger . company, such pncing pract·ires

, f. i• . .
cll)Sely monitored by a f1rn1 s. 1~ance 01v1_s10~. Transfer prj
requires docutnentation that 1s included 1n financiul repor
documents for auditors and regulators.

The transfer pricing rules laid down by a firm must fulfil

following goals:
(i) Maximise the group's profits; and
(ii) Maximise the profits of each profit-centre involved in tr
price transactions.
:-f
i r'l";,-.,.~:-,:"'.-t:,>':'«'il!',•·•-.;. ""'-~~"";·;.,.t ,.,_ --=!'-"'::. ~ ~•,'!.~•-~~r"' ''-"'•~:•·.,..•_"+.:,"'._ ... ~':"""J-.'l>;,~1~•""":''.-~,~"~•-,-..--, :,.''-". ~ ·•·~·~•,r \'.~-''-'•I"•·~~;•~, ... ....,.,,

~ 8.6 CASE STUDIES

~;,.,;.:,,.,,•w~-...,,,,. '"'••.·· ,_... I'· ¥f•~, •• ,..,:

. ,'
. ./.

. :,t
t
i •'

PRICING OF MULTIPLE PRODUCTS

Procter & Gamble or P&G, as it is popularly known, i
multinational giant that spans the globe and is a name ·that
become synonymous with our household needs. P&G is a cons
product manufacturer that sells more than _300 brands to near
billion consumers in over 140 countries. The most popular glo
brands marketed by P&G are Tide, Ariel, Crest, Pantene Pr
Always, Whisper, Didronel, Pringles, Oil of Olay and Vicks. It
thus an excellent example of a muti-product firm, with many of
product competing with each other. Hence P&G had to develop
market segmentation and pricing policy keeping in mind the in
brand _competition in mind._

P&G foJlows a very carefully designed marketing segmenta ·

strategy which is clearly reflected in its pricing policy. lt makes
brands of laundry detergent, 8 brands of soap, 6 brands of sham
4 brands each of liquid dishwasher, detergent, toothpaste and c~f
Many of these brands are offered in several sizes and formulatio -
 ·,e~- II 137
. , pracl IL ~ .
rit1 11 ,~ le, you can buy large or small p_ackages of liquid Tide in
1
r e~i1tl Pf rrns _regular, unscented or wi th bleach. The answer to
0 0
," three trategy lies in the fact that different people want different
, ; boves h d h
,eJ of benefits form t e pro ~cts t ey buy. For example, people
,i~esundry detergent: to get their clothes clean, ~ut they also want
se la . gs from their detergents - such as economy fragrance'
thUl . '
the! softener, strength or mildness, foam, etc. Depending on their
abr!c d lifestyles, consumers have different priorities for each
ab1~t~Y adopting appropriate mar~et segm:ntation and pricing
ene ·es p&G had created an attractive offering for consumers in
. ortant preference groups. AI1its brands combined capture a
I~re@'
7P
rl1 60% of the US laundry detergent market - much more than
rear kgle brand could ~btain by itself. With the help of the right
Y;gstrategy, P&G gets a higher market share with 11 brands of
n~rgent than it could with only one.
~ In the contest of the experience of Proctor & Gamble bring out
1
· the different aspects of p~icing in a multi product firm. Can
you think of other examples of such firms in the Indian market?

CASE STUDY ~."2

BC Ltd. produces leather diaries for the local market. The
ompany'scost data, required mark-up and budgeted sales volume
or one year is given as follows:
t of manufacturing
material costs, use of machinery) f 3,00,000
ixed selling cost (advertising) f 1,00,000
~ erhead costs (rent etc.) f 1,50,000
ariable cost per unit ~10
k-up required . 20%
udgeted sales volume 20,000 units.
should be the selling price on a full cost plus basis?
 ◄
Solution :

{a) co~t r,f nhu1ut,ll·turing

(materi,1~ costs, use of machinery) - t3
(l,) Fi, ed ~lling cost (ad\Tertising)
= ,1,
=
(d Q\-erhead costs (rent etc.) f]
(J) Total variable cClst
(unit ,·ariable cost >< budgeted sales volume)
=
(10 x 20,00J)
=
(e) Total cost- (a)+ (b) + (c) + (d)
(f) ~lark-up on cost (total cost x mark up %)
(7,50,CXX) X 20%) = ,1
(g) Total cost includin g mark-up -_(e) + (f) = ,9
(h) Selling price on a full cost plus basis = f 9,00,
-
,·
·-··
;

lt: 1. Explain the marginal cost pricing and its relevance to public
., and also to a monopoly firm.
t 2 Discuss full cost and marginal cost pricing. Bring out their adv
and disadvant ages.
3. Bring out demand interrelat ionship and product interrelatio
under multi-pro duct pricing.
4. Define transfer pricing and explain how it affects a firm' s profits.
5. V\bat are the manageria l strategies involved in transfer pricing?
6. ~'hy are transfer pricing practices regulated by the government?
7. Write short notes on:
(a) Monopoly and Marginal cost pricing
(bJ Advantag es and limitation s of full cost pricing
(c) Multiple product pricing
8. Explain the foilowing conc.epts:
(a) Marginal cost pricing
(b) Cost plus pricing or mark-up pricing
(c) Multiple product pricing
(d) Product line pridng
. .
r,a,trc.ts - II
;,v,.111g !'fer bn.efly ..
~- IJl \\'hat is the na ture of the dema nd
(a) ,ornpetition?
.
curve m monopol istic
I
(b) \~1ty do public enterprises charge price equal to MC?
,,,) How can the government control monopoly thr gh
. . ou
.
margmal
t
costpncmg.1
(d) What happens to price ~ -d output of a monopolist when the
government regulates pncmg on the basis of MC?
(e) How is full cost pricing determined?
(~ Why is the full cost pricing method more popular than any other
pricing methods?
(g) What are the limitations of full cost pricing ~ethod?
(h) •Explain demand interrelationship.

JECTIVE QUESTIONS

A. Slate with reasons whether the following statements are true or false:
1. Demand curve faced by a firm in monopolistic competition is relatively
inelastic.f ·
2. fa practice, prices charged by firms may not be as per theoretical
Jrinciples. f
3. Public enterprises may charge a price equal to their MC.,
4. 11\case of marginal cost pricing, an enterprise will never incur loss.r
5. Public enterprises may make profit selling some commodities. T
6. Marginal cost pricing does not apply to a private monopoly. F
7. When government regulation is introduced, the AR curve of a
monopolist becomes irrelevant. /
8. Pricing of a product should cover cost alonef'
9. l.tll cost pricing method has certain limitations.1
10. The marginal revenue of a product has two components.r
11.. If the total revenue of commodity A increases due to an increase in
Ille of B, then the A and B are substitute goods. f
lt Transfer pricing is never equal to the ~arket price of the product. ?
l3. Companies use transfer pricing to avoid taxes.(
1
'- Transfer pricing is used to maximise the profits of only one unit of a
I.inn. p
Atr.111, F"lse; For Reasons: Refer Section 8.1.
2. True; For Reasons : Refer Section 8.1.
l True; For Reaso11s : Refer Section 8.2.
14.(1 Busi11ess Economics - II (F.y B C
. . . orn.: SE
4. False; For Reasons: Refer Section 8.2. M~r
5. Tmt; For Reasons : Refer Section 8.2.
6. False; For Reasons : Refer Section 8.2.
7. Tn,e; For Reasons : Refer Section 8.2.
8. False; For Reasons : Refer Section 8.3.
9. True; For Reasons : Refer Section 8.3.
10. Tnte; For Reasons: Refer Section 8.4.
11. False; For Reasons : Refer Section 8.4.
12. False; For Reasons : Refer Section 8:5.
13. True; For Reasons: Refer Section 8.5.
14. False; For Reasons: Refer Section 8.5.
B. Choose the correct answer :
1. Marginal cost pricing is followed by
(a) private manufacturing enterprises
(b) private service enterprises
J.c1 public undertakings (d) the defence sector
2. The reason why public sector undertakings decide to charge a pri
equal to MC is,
~ to increase the demand for essential goods and services
(b) · to increase their profits
(c) to encourage private enterprises
(d) to decrease the demand for their products
3. When public undertakings produce and sell goods and services
purchased by higher income groups, then .
(a) the price will be equal to MC
.~ the price will be equal to or higher than AC
(c) the price will be equal to MR
(d) the price will be below MC and AC
4. In order to control monopoly pricing, the government may impose
price restriction based on
(a) average cost (b) total cost
(c) full cost {pf marginal cost
5. Marginal cost pricing may be charged for which of the following
reasons?
(a) Maximizing profits .(b( To control private monopoly
(c) Mi~imising losses (d) Prevent shut down of the firtn
6. Which of the following is not a feature of full cost pricing method?
(a) Avoids frequent price changes
(b) Most popular pricing method
 . , p,acticC5 - II . 141
,., 1·i1~S .- ·-' on marginal cost
,, I ~1~
,~➔ ideal which most fi1ms aim at
11
(lf) Ad ,termining full cost price, the firm uses
,1i1te e d
• \ fullYallocate average cost (b) only average variable cost
!i·) only overhead costs (d) marginal cost
;e d . . .
( formula for eterrrurung pnce through cost plus pricing method

~
is p:: M (1 + C) (b) P = C + M
(a) p:: C (1/ M) ~rP = C (1 + M)
(c)the formula P = C (1 + M), C represents
9. ~) average variable cost (b) average fixed cost
(cj' fully allocated average cost (d) marginal cost
i ivet1, overhead cos!=? 20,000; variable cost per unit=? 10; output
tO. produced= 1,000 uruts; mark-up= 20%. What will be the price fixed?
(a) t 35 ~t f 36
(c) t 40 . (d) f 46
If fully allocated average cost 1s f 40 and the price fixed is? 75, the
11.
,:nark-up is
(a) 78.5% (b) 75%
(er 87.5% (d) 57.8%
t2. ~Which of the following is a limitation of full cost pricing method?
~ It ignores demand (b) It is not a: popular method
(c) It is not a simple method
(d) Price determined by the method is not always fair
13. _ pricing is a pricing strategy that uses various product class
distinctions.
(a) Marginal cost (b) Full cost
-¥ Multiple-product (d) Transfer
14. Which of the following statements describes transfer pricing?
~ It is carried out by large firms with smaller profit centres
(b) Transfer prices differ considerably from the market prices of the
· products
(c) It is not carried out for tax considerations
(d) It is not regulated by the government
lS, Ccwemment regulates transfer pricing by large multinational firms
(a) in order to promote exports ·
0,) in order to increase foreign direct investment
(c) in order to promote domestic investment
~ ~ in order to prevent tax avoidance by firms
"'-:}!! •(c), (2) • (a), (3) - (b), (4) - (d), (5) - (b), (6) - (c), (7) - (a), (8) - (d),
.,,,, • (c), (10) - (b), (11) - (c), (12) - (a), (1.l) - (c), (14) - (a), (15) - (d)