Ch. 12 continued Flashcards
Products like cruise ships, parking lots, hotels, and stadiums have several characteristics that affect their pricing.
cost of building capacity are fixed or sunk
capacity constraints
increase insurance output only up to capacity but no further
extent decision for industries like hotels, cruises, and parking lots
use marginal analysis
as long as long run marginal revenue is greater > than long run marginal cost.
LRMR > LRMC
stop building when LRMR = LRMC
The relevant costs and benefits of setting price are
the short-run marginal revenue (MR) and short-run marginal cost (MC).
If MR > MC at capacity,
then price to fill available capacity.
if demand is known
setting price is relatively easy to do
to determine optimal price then
balance costs of overpricing against cost of underpricing
If the lost profit from these two pricing errors is symmetric, then the firm should
price so that expected (predicted) demand is just equal to capacity.
This is the target price
if the lost profit from overpricing is less than the lost profit from underpricing, then the firm should
overprice or price above target price
If the cost of overpricing (unused capacity) is smaller than the cost of underpricing (lower margins), then
price higher than would fill capacity on average, and vice versa.
pricing depends on
probability of error
Long-run marginal cost
a. is the cost of building, maintaining, and using an additional unit of capacity. b. is likely to be greater than short-run marginal cost. c. is useful for determining how much capacity to build, but is not useful for setting price. d. All of the above
all of the above
different types of promotional expenditures
affect demand in different ways
For pricing, it is most important to know whether
promotional expenditures make demand more or less price elastic
If promotional expenditures make demand more price elastic, then you should
reduce price when you promote the product.
If promotional expenditures make demand less price elastic, then you should
increase price when you promote the product.
promotional campaigns are trying to reduce the customer’s sensitivity to price.
In this case, it makes sense to increase price.
for ex: celebrities using products
Advertising that conveys an image of high product quality makes demand ___________ and should be accompanied with a ____________.
a. more elastic ; price increase b. more elastic ; price decrease c. less elastic ; price increase d. less elastic ; price decrease
c. less elastic ; price increase
To go along with its new advertising campaign, a company reduced its prices. The advertising likely featured
a. a celebrity endorsement. b. a favourable price comparison to a rival product. c. an attempt to reduce customers' price sensitivity. d. All of the above.
b. a favourable price comparison to a rival product.
reference price is simply
how much we expect something to cost, given the environment.
Managing price expectations is
as important as managing price.
Prospect theory implies that consumers are motivated not by the actual price level, but rather by
comparison of the price level to the reference price.
retailers should focus
on “cash discounts” rather than “credit card surcharges” and airlines on “discounts for not checking bags” rather than “checked bag fees.”
losses and gains are
superadditive
Integrate losses but
separate gains
Which of the following is likely to be a profitable adjustment to pricing strategy?
a. A firm decreases consumers' expectations of the price that they will pay. b. A pizza restaurant changes from charging a "delivery charge" to offering an "in-store discount." c. A utility replaces its "processing fees" line-item on its bill with an itemized list of each of the constituent fees. d. None of these is likely to be a profitable adjustment.
b. A pizza restaurant changes from charging a “delivery charge” to offering an “in-store discount.”
Cannibalization refers to
a. customers switching from one company's product to a rival company's substitute product. b. customers switching from one company's product to a rival company's complementary product. c. customers switching from one company's product to the same company's substitute product. d. customers switching from one company's product to the same company's complementary product.
c. customers switching from one company’s product to the same company’s substitute product.
When two firms, each producing one product, merge, the new entity should _____ prices if the products are complements and ______ prices if the products are substitutes.
a. lower; lower b. lower; raise c. raise; lower d. raise; raise
b. lower; raise
An airline estimates that the potential cost of underpricing is less than the potential lost profit of unfilled seats. The airline should
a. set a price equal to the "target price" so that expected demand is equal to each plane's capacity. b. set a price above the "target price" so that expected demand is, on average, below capacity. c. set a price below the "target price" so that expected demand is, on average, above capacity. d. always set a price where MR=MC.
c. set a price below the “target price” so that expected demand is, on average, above capacity.
Which of the following is true about advertising?
a. A company should always accompany advertising campaigns with price reductions. b. Advertising campaigns use celebrity endorsements to make demand more elastic. c. Advertising generally reduces customers' sensitivity to price. d. Advertising can increase or decrease demand elasticity depending on the type of promotion.
d. Advertising can increase or decrease demand elasticity depending on the type of promotion.
A consumer in an electronics store expects that an inexpensive computer and an office printer should each cost about $500. However, the store owner is willing to sell both the computer and printer for $1100. According to prospect theory, which of the following combinations of prices totaling $1100 is likely to generate the greatest satisfaction for the consumer.
a. $600 for the computer, $500 for the printer. b. $550 for the computer, $550 for the printer. c. $599 for the computer, $501 for the printer. d. All of the above are likely to generate the same satisfaction since the total is identical in all cases.
a. $600 for the computer, $500 for the printer.
After massive promotion of Rihanna’s latest music album, the producers reacted by raising prices for her albums. This implies that promotion expenditures made the album demand
more elastic.
unitary elastic.
change due to psychological pricing.
less elastic.
more elastic.
All of the following choices are examples of promoting a firm’s product, except
celebrity endorsements.
pricing.
discount coupons.
end-of-aisle displays.
pricing
A firm that acquires a substitute product can reduce cannibalization by
doing nothing.
repositioning a product so that it does not directly compete with the substitute.
setting the same price on both products.
lowering prices on the low-margin products.
repositioning a product so that it does not directly compete with the substitute.
A shoe-producing firm decides to acquire a firm that produces shoe laces. This implies that the firm’s aggregate demand (shoes + laces) will be
less elastic than the individual demands.
more elastic than the individual demands.
equally elastic as the individual demands.
none of the above.
more elastic than the individual demands.
After firm A producing one good acquired another firm B producing another good, it lowered the prices for both goods. One can conclude that the goods were
substitutes.
complements.
not related.
none of the above
complements
Firms tend to raise the price of their goods after acquiring a firm that sells a substitute good because
they lose market power.
there is an increase in the overall demand for their products.
the aggregate demand for both goods is more elastic than the demand for the individual goods.
the aggregate demand for both goods is less elastic than the demand for the individual goods.
the aggregate demand for both goods is less elastic than the demand for the individual goods.
For products like parking lots and hotels, costs of building capacity are mostly fixed or sunk and firms in this industry typically face capacity constraints. Therefore,
if MR > MC at capacity, then the firms should price to fill capacity.
if MR < MC at capacity, then the firms should price to fill capacity.
if LRMR > LRMC at capacity, then the firms should price to fill capacity.
if LRMR < LRMC at capacity, then the firms should price to fill capacity.
if MR > MC at capacity, then the firms should price to fill capacity.
A firm started advertising its product and this changed the product’s elasticity from −2 to −1.5. If, prior to advertising, the firm charged $10, the firm should
raise price from $10 to $15.00.
reduce price from $10 to $6.67.
raise price from $10 to $13.33.
reduce price from $10 to $7.50.
raise price from $10 to $15.00.
MC = 10 (1 - 1/e) MC= 10 (1 - 1/2) MC= 5
After running a promotional campaign, the owners of a local hardware store decided to decrease the prices for the advertised products sold in their store. One can infer that
the promotional expenditures made the demand for the advertised products more elastic.
the promotional expenditures made the demand for the advertised products less elastic.
the promotional expenditures had no effect on the demand elasticity.
the owners got it wrong. To cover the promotional expenses, they should have raised the prices.
the promotional expenditures made the demand for the advertised products more elastic.
On average, if demand is unknown and costs of underpricing are _______ than the costs of overpricing, then _______ .
smaller; overprice
smaller; underprice
larger; underprice
none of the above
smaller; underprice
