What is cost-plus pricing? Why do some firms use cost-plus pricing even when the firms' managers have the resources to devise a pricing strategy that would result in greater profits?
What will be an ideal response?
When a firm uses cost-plus pricing to set the price of a product, it adds a percentage markup (for example, 10 percent or 30 percent) to its average cost at a particular level of production. If the firm sells more than one product the markup is intended to cover all costs, including those that cannot easily be assigned to a particular product. Economists believe that cost-plus pricing may be the best strategy for a firm, even a firm able to afford a more sophisticated pricing strategy, in two situations. First, when the firm's marginal cost and average cost are nearly equal. Second, when estimation of the firm's demand curve is difficult. Many large firms that use cost-plus pricing do not simply charge the marked-up price but alter the price based on the response of consumers in the market and the degree of competition in their industry.
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A change in the distribution of income that leaves total income constant will not shift the market demand curve for a product providing:
a. everyone has an income elasticity of demand of zero for the product. b. everyone has the same income elasticity of demand for the product. c. individuals have differing income elasticities for the product, but the average income elasticity for income gainers is equal to the average income elasticity for income losers. d. any of the above conditions occur.
A pure monopolist sells output for $4.00 per unit at the current level of production. At this level of output, the marginal cost is $3.00, average variable costs are $3.75, and average total costs are $4.25. The marginal revenue is $3.00. What is the
short-run condition for the monopolist and what output changes would you recommend? What will be an ideal response?