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Exam 15: Pricing Practices

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Question 21

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When e_P = -2, the optimal markup on cost is:

A) 100%
B) 67%
C) 50%
D) 33%

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Question 22

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Consumers' surplus is:

A) the costs consumers would have to pay to produce a product minus the amount paid to sellers.
B) the consumer's budget minus total expenditures.
C) the value of a good to consumers minus the amount paid sellers.
D) quantity supplied minus quantity demanded.

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Question 23

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If a firm charges a price of $5 for a product with a cost of $2, the markup on price equals:

Markup on Price. TLC Tree Service, Inc., provides tree spraying services to residential customers in the Detroit area. The company recently raised its service price from $50 to $60 per tree. As a result, sales fell to 3,900 from 4,900 units in the prior year. A. Calculate the arc price elasticity of demand for TLC service. B. Assume that the arc price elasticity (from Part A) is the best available estimate of the point price elasticity of demand. If marginal cost is $12 per unit for labor and materials, calculate TLC's optimal markup on price and its optimal price.

Joint Product Pricing. The Frank Boulger Mining Company operates the Million Dollar Mine in Leadville, Colorado. Each ton of mined ore yields one ounce of silver and one pound of lead in a fixed 1:1 ratio. Marginal costs are $8 per ton of ore mined. The demand and marginal revenue curves for silver are:

Optimal Price. Japanese Imports, Inc., recently offered rebates of $375 off the regular $25,000 price on Sayonara mini SUVs. Sales responded, rising 12% over the previous month's level. A. Calculate the point price elasticity of demand for Sayonara vehicles. B. If marginal cost per unit is $21,875, was the original $25,000 price optimal?

Consumers' surplus represents:

If a firm charges a price of $6 for a product with a cost of $4, the markup on cost equals:

Markup on Price. Plan It Right, Inc., provides party planning and catering services for elegant residential parties in the Louisville area. The company recently raised its service price from $900 to $1,100 per party. As a result, sales fell to 350 from 450 units in the year earlier period. A. Calculate the arc price elasticity of demand for PIR service. B. Assume that the arc price elasticity (from part A) is the best available estimate of the point price elasticity of demand. If marginal cost is $220 per unit for labor and materials, calculate PIR's optimal markup on price and its optimal price.

Markup on Cost. Oil-n-Go, Inc., offers automobile oil changes at a number of outlets in the greater Ann Arbor area. The company recently initiated a policy of matching the lowest advertised competitor price. As a result, Oil-n-Go has been forced to reduce the average price for oil changes by 5%, but has enjoyed a 15% increase in customer traffic. Meanwhile, marginal costs have held steady at $20 per oil change. A. Calculate the point price elasticity of demand for oil changes. B. Calculate Oil-n-Go's optimal price and markup on cost.

Optimal Markup. Ralph Kramden is managing partner of Kramden & Associates, Inc., a New York-based management consulting firm. Kramden has asked you to complete an analysis of profit margins for Ed Norton, Inc., a client firm. Unfortunately, your predecessor on this project was abruptly transferred, leaving only sketchy information on the clients' pricing practices.

When e_P = -1, the optimal markup on price is:

Profit margin equals:

When transferred products can be sold in perfectly competitive external markets, the optimal transfer price is the:

Joint Product Pricing. The Golden State Mining Company operates a small gold and copper mine in a remote region of the Sierra Nevadas. Each ton of mined ore yields one ounce of gold and one pound of copper in a fixed 1:1 ratio. Marginal costs are $450 per ton of ore mined, plus a $30 per ton state land reclamation tax. The demand and marginal revenue curves for gold are:

Incremental Analysis. Sanford & Sons Construction Company is a building contractor serving the Mid-Atlantic region. The company recently bid on construction of a new office building in Richmond, Virginia. Sanford & Sons has incurred bid development and marketing expenses of $50,000 prior to submission of the bid. The bid was based on the following projected costs:

Optimal Price. Woofer-Tweeter, Inc., recently offered instant rebates of $25 off the regular $1,000 price on Soundman CD players. Sales responded, rising 6.25% over the previous month's level. A. Calculate the point price elasticity of demand for Soundman CD players. B. If marginal cost per unit is $600, was the original $1,000 price optimal?

The optimal markup on price will fall following an increase in:

Optimal Markup. Carol Vessey is a managing partner of Dry Air, Inc., a New Orleans-based dehumidifier-systems distribution firm. Vessey has been asked to complete an analysis of profit margins for the firm. Unfortunately, her predecessor on this project was abruptly transferred, leaving little information on the firm's current pricing practices.

Incremental Analysis. Fan Diego, Inc., manufactures a hand-held electric hair dryer. Sales have increased steadily during recent years and, because of a recently completed expansion program, annual capacity is now 250,000 units. Production and sales during the coming year are forecast at 150,000 units, and standard production costs have been estimated as: In addition to production costs, Fan Diego incurs fixed selling expenses of 50¢ per unit, and variable warranty repair expenses of 75¢ per unit. Fan Diego currently receives $8.25 per unit from its customers (primarily retail department stores) and expects this price to hold during the coming year. After making the above projections, Fan Diego received an inquiry concerning the purchase of a large number of units by a discount department store. The inquiry contained two purchase offers: