Chapter 6: Pricing decisions
1. The price elasticity of demand for a product at its current price level is inelastic. What will happen to the total
revenue and the profit if the price of the product is reduced?
2. The following statements have been made about price elasticity of demand.
(1) When sales demand is inelastic, a company can increase profits by raising the selling price of its product.
(2) Price elasticity of demand is measured as the amount of change in sales price (measured as a percentage of
the current sales price) divided by the amount of change in quantity demanded (measured as a percentage of
the current sales volume).
Which of the above statements is/are true?
A 1 only
B 2 only
C Neither 1 nor 2
D Both 1 and 2
3. Which method of pricing is most easily applied when two or more markets for the product or service can be kept
entirely separate from each other?
A Price discrimination
B Product line pricing
C Skimming
D Volume discounting
4. The demand for a product at its current price has a price elasticity greater than 1.0 (ignoring the minus sign).
Which of the following statements must be correct?
(1) A reduction in the sales price will increase total revenue.
(2) A reduction in the sales price by x% will result in a percentage increase in sales demand which is greater than
x%.
(3) An increase in the selling price will increase total profit.
A Statements 1 and 2
B Statements 1 and 3
C Statements 2 and 3
D Statements 1, 2 and 3
5. Market research into demand for a product indicates that when the selling price per unit is $145, demand in
each period will be 5,000 units; if the price is $120, demand will be 11,250 units. It is assumed that the demand
function for this product is linear. The variable cost per unit is $27.
What selling price should be charged in order to maximise the monthly profit?
$
6. Which of the following statements is true of pricing?
A Discrimination is always illegal so everyone should pay the same amount
B Early adopters get a discount for being first in the market
C Pricing against a similar competitor is important in the Internet age
D Price to make the most sales in that way you will always get the most profit
7. Which of the following statements regarding market penetration as a pricing strategy is/are correct?
(1) It is useful if significant economies of scale can be achieved.
(2) It is useful if demand for a product is highly elastic.
A (1) only
B (2) only
C Neither (1) nor (2)
D Both (1) and (2)
8. Which of the following conditions would need to be true for a price skimming strategy to be effective?
A An existing product where the owners have decided to increase prices to move the product up market
B Where the product has a long life-cycle
C Where the product has a short life-cycle
D Where only modest development costs had been incurred
9. Which TWO of the following circumstances (in relation to the launch of a new product) favour a penetration
pricing strategy?
• Demand is relatively inelastic
• There are significant economies of scale
• The firm wishes to discourage new entrants to the market
• The product life cycle is particularly short
10. Which of the following conditions must be true for a price discrimination strategy to be effective?
A Buying power of customers must be similar in both market segments
B Goods must not be able to move freely between market segments
C Goods must be able to move freely between market segments
D The demand curves in each market must be the same
11. If demand for a product is 5,000 units when the price is $400 and 6,000 units when the price is $380, what are
the demand and MR equations?
12. The demand for a product is 5,000 units when the price is $400 and 6,000 units when price is $380. The variable
cost of the product is $200. What is the optimum price to be charged in order to maximise profit?
A $150
B $200
C $350
D $700
13. A brand new game is about to be launched. The game is unique and can only be played on the Star2000 gaming
console, another one of the businesses products. Students are entitled to a small discount.
Which THREE of the following pricing strategies could be used to price the game?
• Penetration pricing
• Price skimming
• Complimentary product pricing
• Product line pricing
• Price discrimination
• Variable production cost + %
14. The following price and demand combinations have been given:
P1 = $400, Q1 = 5,000 units
P2 = $380, Q2 = 5,500 units
The variable cost is a constant at $80 per unit and fixed costs are $600,000 per annum.
What is the demand function?
A P = 200 – 0.04Q
B P = 600 – 0.04Q
C P = 600 + 0.04Q
D P = 200 – 20Q
15. The following price and demand combinations have been given:
P1 = $400, Q1 = 5,000 units
P2 = $380, Q2 = 5,500 units
The variable cost is a constant at $80 per unit and fixed costs are $600,000 per annum.
The optimal price is (to the nearest $):
$
