Economics Chapter on Elasticity
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Questions and Answers

What does it indicate when the elasticity coefficient is greater than 1?

  • Demand is perfectly inelastic.
  • Demand is elastic. (correct)
  • Demand is unitary elastic.
  • Supply exceeds demand.
  • If demand is inelastic, what is the expected outcome of a price increase?

  • Quantity demanded will decrease significantly.
  • Quantity demanded will increase.
  • Quantity demanded will remain unchanged.
  • Quantity demanded will decrease only slightly. (correct)
  • Which scenario describes perfectly elastic demand?

  • Quantity demanded remains the same regardless of price changes.
  • A slight increase in price leads to a large decrease in quantity demanded. (correct)
  • A price change has no impact on the quantity demanded.
  • A large price increase results in no sales.
  • When demand is unitary elastic, what does this imply about the relationship between price and quantity demanded?

    <p>The percentage change in quantity demanded equals the percentage change in price.</p> Signup and view all the answers

    What happens to prices when supply exceeds demand in a market?

    <p>Prices will fall.</p> Signup and view all the answers

    What is the primary factor influencing the cost-based pricing method?

    <p>Cost of production</p> Signup and view all the answers

    In the cost markup formula, what is represented by the variable 'Mark-up%'?

    <p>The percentage of profit margin</p> Signup and view all the answers

    Which pricing strategy would be most appropriate for a company selling a unique, patented drug?

    <p>Cost-based method</p> Signup and view all the answers

    Which of the following factors does NOT influence a cost-based pricing approach?

    <p>Competitor prices</p> Signup and view all the answers

    What does the term 'Price Death Spiral' refer to in pricing strategy?

    <p>A situation where prices continually decrease, harming profitability</p> Signup and view all the answers

    What is the formula for calculating markup percentage?

    <p>Selling price - purchase cost / purchase cost</p> Signup and view all the answers

    Which pricing strategy is characterized by starting with desired profit to set product prices?

    <p>Target costing</p> Signup and view all the answers

    Which of the following statements accurately describes price setters?

    <p>They can set prices based on desired profit without competition.</p> Signup and view all the answers

    In the target costing method, what is the target cost dependent on?

    <p>Market price minus desired profit</p> Signup and view all the answers

    How does traditional pricing differ from target costing?

    <p>Traditional pricing starts with cost while target costing begins with price.</p> Signup and view all the answers

    What does the absorption cost include in the context of markup cost basis?

    <p>Cost of goods sold (COGS)</p> Signup and view all the answers

    Which of the following best describes a price taker?

    <p>A business that must adhere to prevailing market prices.</p> Signup and view all the answers

    What is the purpose of cost-plus pricing?

    <p>To ensure a specific profit margin over the cost.</p> Signup and view all the answers

    What is the formula for calculating the price when using the price maker approach?

    <p>Price = Cost x (1 + Mark-up%)</p> Signup and view all the answers

    Why do retailers commonly use the Variable Cost Method?

    <p>They think in terms of buying and selling the core variable cost.</p> Signup and view all the answers

    Which pricing method involves setting prices based on competitors' prices?

    <p>Competition-based pricing</p> Signup and view all the answers

    In which scenario would a company most likely employ the Total Cost or Full Cost Method?

    <p>When capitalizing on all expenses related to production, even failures.</p> Signup and view all the answers

    What does the term 'death spiral' refer to?

    <p>The elimination of products resulting in higher overhead costs per item.</p> Signup and view all the answers

    What distinguishes Cost plus target rate of return pricing from Cost plus pricing?

    <p>The setting of prices to earn a specific return on capital.</p> Signup and view all the answers

    How is the absorption cost calculated in the price maker approach?

    <p>Cost x 1.7404</p> Signup and view all the answers

    What is the outcome of using a price taker approach?

    <p>Costs are derived from prevailing market prices.</p> Signup and view all the answers

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