Click on the box next to each answer. Keep track of your own score.

1. What a product is worth to someone is known as:
   • A. price. INCORRECT What someone pays for a product is often different from  what it is worth to that person. People are more  likely to buy when a product is priced at less  than it is perceived to be worth.
   • B. cost. INCORRECT Cost is what is invested into making a product or into  a product that is resold at some price.
   • C. value. CORRECT If value is higher than the price paid, the buyer is  probably satisfied; if value is lower than the  price paid, then the buyer is probably  dissatisfied.
   • D. elasticity. INCORRECT  
2. Price elasticity of demand has to do with:
   • A. the ratio of variable costs to fixed costs. INCORRECT I can't imagine wanting to know such a ratio; what it could   possibly mean is beyond me.
   • B. how much you could get for a Porsche vs. a Chevrolet. INCORRECT Actually, this isn't too bad of an answer.  The   price for a Porsche is probably much less elastic   than the price for a Chevrolet.  That is, a   moderate change in the price of a Porsche might   result in a small change in demand for that brand,   while a moderate change in the price of a Chevrolet   might result in a larger change in demand for that   brand.
   • C. customers' sensitivity to a change in price. CORRECT See Answer B for an explanation.  
3. In a price skimming strategy, we would:
   • A. set a high price to maximize profits. CORRECT A skimming strategy attempts to "skim the cream off   the top." For example, a skimming strategy can   be used because you don't expect to be competitive   in the long run, so you set high prices to maximize   profit in the short run before you ultimately pull   the product from the market.
   • B. set a low price to maximize sales. INCORRECT The only way that setting a low price will maximize profits   is if it increases sales.  That certainly is a   viable strategy in some situations, but it is not   called a skimming strategy.
4. In a penetration pricing strategy, we would:
   • A. set a high price to maximize profits. INCORRECT Setting a high price can increase profits in the short run,   but in most situations, this will cause a decrease   in market share in the long run.  "Penetration"   means that we are attempting to increase sales and   implies that we are attemptint to increase market   share.
   • B. set a low price to maximize profits. CORRECT Penetration means that we are attempting to increase sales,   and this usually means that we are attempting to   increase market share.
5. Price skimming:
   • A. keeps prices bouncing just above costs. INCORRECT  
   • B. is a form of price bundling. INCORRECT  
   • C. could make sense if little chance of future competition. CORRECT  
   • D. is a form of competitive pricing. INCORRECT  
6. A penetration pricing strategy:
   • A. would likely result in a small market share. INCORRECT  
   • B. would likely result in a small margin. CORRECT  
   • C. would likely result in higher competition. INCORRECT  
   • D. would position a product at the high end of the market. INCORRECT  
7. Sometimes we can set a high price to increase demand for a product.  This strategy is called:
   • A. price bundling. INCORRECT Price bundling or bundle pricing is when you offer a package   of features for one price.  E.g., you could buy a   computer, monitor, and software separately, but most of   us prefer to compare prices of a package that includes   all of these items bundled together.
   • B. reference pricing. INCORRECT Reference pricing is when the buyer is given something to which   to compare a price.  "Their price, our price," or   "manufacturer's suggested price," or "compare to"   are forms of reference pricing.
   • C. competitive parity (competitive matching). INCORRECT Competitive parity means that we are setting a price that is   about the same as competitors set.  For example, you   stop at a rest area on the Interstate highway and a vending   machine soft drink is priced at, say, $1.50.  If this   is a typical price in a multi-state area, the vendor might   lose sales if pricing much higher.  However, the   vendor would probably not see an increase in sales if   setting a price lower than this as the expected price.    Setting a lower price or a higher price, then, would function   only to decrease profits in this situation.
   • D. prestige pricing. CORRECT A $5.95 watch at Wal*Mart will almost always keep   substantially better time than a brand new, certified   chronometer Rolex watch.  The reason is that Rolex   watches are all old-fashioned spring-wound watches - the   mechanical technology that was useful in the 1800s is no   match to modern crystal-controlled (quartz) technology.    Rolex has been able to compete by maintaining high quality   on the jewelry value rather than the time-keeping value of   its products and by maintaining high prices.  Competing   makers of mechanical spring-powered watches lowered prices   when quartz technology became competitive in the 1970s and   most are now out of business (or the brand name is still used   by a company that is not the same as the original brand).  If Rolex lowered prices and started selling on Wal*Mart shelves,   demand for the brand would ultimately decrease.  The   high price maintains the prestige that this brand has always   enjoyed, causing demand to stay high.
8. In a retail setting, a sale tag often includes the original price from which the markdown was made. This is known as a(n):
   • A. reference price. CORRECT  
   • B. price bundling. INCORRECT  
   • C. complementary pricing. INCORRECT  
   • D. price discrimination. INCORRECT  
9. Microsoft launched its Xbox videogame console at a price of $299, exactly the same price as the market leader, Sony's PlayStation 2.  Microsoft was using a strategy of
   • A. price skimming. INCORRECT  
   • B. penetration pricing. INCORRECT  
   • C. reference pricing. INCORRECT  
   • D. competitive pricing. CORRECT  
10. Jane purchased a Lexmark inkjet printer on sale and was surprised to find how low prices were for inkjet printers.  She was even more surprised, however, to find that the price of a pair of ink cartridges was almost as high as the price she paid for the printer.  Lexmark is apparently using:
    • A. a reference pricing strategy. INCORRECT No price in this example uses another price as a point of   comparison.
    • B. a price bundling strategy. INCORRECT Inkjet printers are often bundled with a half-filled starter   starter cartridge, but the price is set merely to cover cost   to encourage purchase (i.e., at little or no profit).    Profits are not made on the printer, but on future sales of   the cartridges.  This longer term strategy is not an   example of bundling.
    • C. a complementary pricing strategy. CORRECT See Answer B for an explanation of complementary pricing.   In this case, we have two products that complement each   other, and one d to encourage sales of the other.
    • D. a price discrimination strategy. INCORRECT Price discrimination has to do with setting different prices   for different buyers.
11. Johnson Lumber sells construction materials to contractors.  Johnson sells to Fred's Construction Co. at prices substantially lower than the prices given to Sally's Homebuilders Inc.  Certainly, there is discrimination in pricing.  Is this illegal?:
    • A. Yes. INCORRECT If both buyers purchase approximately the same materials, buy   in the same order quantities, receive materials in the   same delivery quantities, require about the same amount   of services, and generate about the same amount in   transaction costs, then discriminating on price would   probably be illegal in the US.  But this case gives   us no information to suggest that different or similar   costs are incurred when doing business with these buyers.   See Answer C.
    • B. Maybe. INCORRECT An answer could be "maybe, maybe not." See Answer C.
    • C. No. INCORRECT If Fred frequently buys in large quantities and Sally only   occasionally buys a small quantity, then the   transaction costs of doing business with Sally are   likely to be substantially higher.  It would be   a business necessity to recover the higher costs of   doing business with Sally, and this is certainly   legitimate and permitted in the US.  But we   aren't given information in this case that would   enable us to make a determination.  See Answer A.
    • D. I don't know. CORRECT See the other answers.  We don't have enough information to   make a determination in his case.  Setting different   prices for different customers can be illegal in the US,   but discriminating on price isn't necessarily illegal.
12. Wal*Mart is often accused of predatory pricing when it opens new stores.  For example, it might sell paint for a price per gallon that is higher than the price that the local hardware store pays to its supplier for the same brand.  In the US, is this illegal?:
    • A. Yes. INCORRECT This is predatory pricing if Wal*Mart sets its prices with the   intention of harming the local hardware store. .   While this could indeed be the intention of Wal*Mart, it   would be very difficult to prove because Wal*Mart, as   an international retailer that buys in large quantities   directly from manufacturers, most certainly has lower   transaction and distribution costs than the hardware store   and its supplier.  We don't know the true intention   of the giant retailer in this case and we most likely   could never find evidence to support such an intention.
    • B. Maybe yes, maybe no.  It depends. CORRECT See Answers A and B.  People often have a suspicion of   predatory behavior, but it would be difficult to prove   in this case.
    • C. No. INCORRECT See Answer A.  The issue has to do with the intention of   Wal*Mart.  We don't know the intention and we aren't   likely to be able to prove intention even if we had a   suspicion of predatory pricing.
13. A major chain grocery store is selling hot dog buns this weekend for nineteen cents per package of twelve.  The local mom and pop grocery cannot compete - it is paying over a dollar per package and would have to take a loss of over eighty cents to compete on price.  Is the chain grocery store using predatory pricing?
    • A. Yes. INCORRECT This is most certainly what we would call a loss leader. The   intention of the chain store is to use a temporary sales   promotion that encourages people to enter the store and to   purchase complimentary products.
    • B. Maybe. INCORRECT See Answer A.  This is almost certainly a temporary sales promotion   known as a loss leader
    • C. No. CORRECT The bun price is almost certainly a loss leader.  The chain   probably put these on sale for a brief period of time and   is admitedly taking a substantial loos.  It serves a   promotional function, however, and most likely would lead   to sales of complementary items.  If it is a July fourth   weekend in the US, for example, we expect that people would   be shopping for hot dogs, ketchup, paper plates, and such.    The loss leader item is advertised to get people into the store,   and once there, they will purchase the complementary items at   full price and full profit.  If the price is temporary and was done merely to compete temporarily   rather than to put the competitor out of business, then this   is not predatory pricing in the US.
14. A retailer advertises a brand of TV as being on sale for $500 off the retail price.  This is a brand that is sold by no other retailers, and this retailer has never sold it at the claimed retail price.  In the US, is this deceptive pricing?
    • A. Most probably. CORRECT  
    • B. Probably not. INCORRECT