l6 : product pricing

Question 1

what is the economists approach to optimal pricing?

Answer 1

MC = MR

Question 2

what is the mathematical approach to optimal pricing?

Answer 2

dπ / dQ = 0

Question 3

what are the difficulties with optimal pricing?

Answer 3

• non price factors influence demand (quality, advertising)
• objective of profit max is assumed
• estimating demand function is difficult

Question 4

what are the three pricing decision methods?

Answer 4

• optimal pricing
• cost plus pricing
• contribution margin + margin price

Question 5

what is the rationale of cost plus pricing?

Answer 5

price is set so that costs are covered in order to make profit. price based on measurement of appropriate costs.

Question 6

what is the procedure when setting prices using cost plus pricing?

Answer 6

identify all costs then add a profit %. creates a profit margin.

Question 7

what are the problems of using cost plus pricing?

Answer 7

• treatment of overheads (fixed overheads don’t vary)
• adding a simple % profit margin won’t maximise profit
• ignores demand conditions (can lead to sub optimal decisions)

Question 8

what is the rationale of contribution margin + margin price?

Answer 8

if price > variable cost, then production will generate a contribution to fixed costs and profits

Question 9

what are the problems of using contribution margin + margin price?

Answer 9

• need to cover fixed costs in long run (actual price must be greater than minimum)
• customer expectations affected by low prices

Question 10

what are some things to remember about contribution margin + margin price?

Answer 10

• generates info for price decisions rather than to determine actual prices
• VC is SHORT run minimum price

Question 11

what are the four special operating decisions?

Answer 11

• make or buy
• keep or drop
• charge special order
• deal with scarce resources