Pricing Strategy Fundamentals Practice Exam

Question 1 Pricing Strategy Fundamentals

What is income elasticity of demand?

EDLP holds prices low and steady; high-low uses high regular prices with frequent promotional discounts. A 1% change in price causes an exact 1% change in quantity demanded (elasticity = 1). The percentage change in quantity demanded divided by the percentage change in consumer income. Setting prices below cost with the intent of driving competitors out of business, then raising prices later.

Question 2 Pricing Strategy Fundamentals

What is the rule of 100 in advertising?

Charging higher regular prices but running frequent promotions and discounts to drive traffic. When a product's price is under $100, advertise the percentage discount; when over $100, advertise the dollar amount saved. A statistical method that determines how customers value different features of a product, useful for setting feature-based prices. The amount added to cost to set the selling price, expressed as a percentage of cost.

Question 3 Pricing Strategy Fundamentals

What is price leadership?

A situation where one dominant firm sets the price and other competitors follow. Return on Investment — the profit earned on the capital invested, often used as a target-return pricing benchmark. The good is an inferior good — demand falls as income rises. A strategy where prices fluctuate in near real-time based on market demand, supply, competitor prices, or customer profile.

Question 4 Pricing Strategy Fundamentals

What is flat-rate pricing?

A graph showing the relationship between the price of a good and the quantity demanded at each price. Charging customers a recurring fee (weekly, monthly, annually) for continued access to a product or service. Produce where marginal revenue equals marginal cost (MR = MC). Charging a single fixed price regardless of usage or customer characteristics.

Question 5 Pricing Strategy Fundamentals

What is a seasonal discount?

Charging a single fixed price regardless of usage or customer characteristics. Charging different prices to different customer groups for essentially the same product or service. A price reduction offered during off-peak seasons to stimulate demand. Setting a high initial price to capture consumers willing to pay a premium, then lowering it over time.

Question 6 Pricing Strategy Fundamentals

What is limit pricing?

A framework: the price the customer pays must exceed the cost to serve and be less than the perceived value created. Price and total revenue move in opposite directions: lowering price increases revenue. A discount applied to a single large order but not carried forward to future orders. Setting a price low enough to deter new competitors from entering the market.

Question 7 Pricing Strategy Fundamentals

What is demand-based pricing?

Pricing adjusted according to the level of customer demand for a product at different times or segments. A shortage develops because quantity demanded exceeds quantity supplied. Offering differentiated versions of a product (e.g. basic, pro, enterprise) at different price points. Using price to communicate something about product quality, exclusivity, or positioning.

Question 8 Pricing Strategy Fundamentals

What is price discrimination?

Charging different prices to different customer groups for essentially the same product or service. A measure of how much the quantity demanded of a product changes in response to a change in its price. Selling Price = Unit Cost × (1 + Markup Percentage). The amount added to cost to set the selling price, expressed as a percentage of cost.

Question 9 Pricing Strategy Fundamentals

What happens when a price ceiling is set below the equilibrium price?

The good is an inferior good — demand falls as income rises. The percentage change in quantity demanded divided by the percentage change in consumer income. When a product's price is under $100, advertise the percentage discount; when over $100, advertise the dollar amount saved. A shortage develops because quantity demanded exceeds quantity supplied.

Question 10 Pricing Strategy Fundamentals

What is the demand curve?

Price per unit minus variable cost per unit — the amount each unit contributes to covering fixed costs and generating profit. The maximum price a customer is willing to pay for a product or service. To capture value, generate revenue, and align price with customer perception, costs, and competition. A graph showing the relationship between the price of a good and the quantity demanded at each price.

Question 11 Pricing Strategy Fundamentals

What is the supply curve?

The percentage change in quantity demanded divided by the percentage change in consumer income. A strategy where prices fluctuate in near real-time based on market demand, supply, competitor prices, or customer profile. A graph showing the relationship between the price of a good and the quantity producers are willing to supply at each price. Charging different prices to different customer groups for essentially the same product or service.

Question 12 Pricing Strategy Fundamentals

What is value-based pricing?

Charging higher prices during high-demand periods and lower prices during low-demand periods. A price reduction offered during off-peak seasons to stimulate demand. It violates antitrust laws in many jurisdictions, as it can harm competition and consumers long term. Setting price primarily based on the perceived value to the customer rather than on the cost of production.

Question 13 Pricing Strategy Fundamentals

What is price elasticity of demand?

Pricing charged between divisions of the same company, often used in international trade. Break-even Units = Fixed Costs / (Price − Variable Cost per Unit). A measure of how much the quantity demanded of a product changes in response to a change in its price. Using round numbers (e.g. $100, $500) to convey quality and exclusivity.

Question 14 Pricing Strategy Fundamentals

What is target-return (target-profit) pricing?

The amount added to cost to set the selling price, expressed as a percentage of cost. MSRP is a suggested price; MAP is a minimum price the manufacturer requires retailers to advertise. Setting price to achieve a specified rate of return on investment at an expected sales volume. When a product's price is under $100, advertise the percentage discount; when over $100, advertise the dollar amount saved.

Question 15 Pricing Strategy Fundamentals

What does inelastic demand mean?

A new low-cost entrant, excess industry capacity, or a competitor's aggressive price cut. A change in price causes a proportionally smaller change in quantity demanded (elasticity magnitude < 1). Charging different prices to different customer groups for essentially the same product or service. A measure of how much the quantity demanded of a product changes in response to a change in its price.

Question 16 Pricing Strategy Fundamentals

What is contribution margin?

All else equal, when the price of a good rises, the quantity demanded falls, and vice versa. The good is an inferior good — demand falls as income rises. The price at which the quantity supplied equals the quantity demanded. Price per unit minus variable cost per unit — the amount each unit contributes to covering fixed costs and generating profit.

Question 17 Pricing Strategy Fundamentals

What is a trade discount?

A small change in price causes a proportionally larger change in quantity demanded (elasticity magnitude > 1). Keeping prices deliberately high to signal quality, exclusivity, or luxury status. A discount given to channel partners (wholesalers, retailers) off the list price. List price is the published/retail price; net price is what the customer actually pays after discounts, rebates, and adjustments.

Question 18 Pricing Strategy Fundamentals

What is cross-price elasticity of demand?

Selling Price = Unit Cost × (1 + Markup Percentage). A pricing research technique that asks consumers how likely they are to buy at various price points to estimate demand curves. Customer, Cost, and Competition. The percentage change in quantity demanded of one good divided by the percentage change in price of another good.

Question 19 Pricing Strategy Fundamentals

What is the difference between bundling and tying?

Customer, Cost, and Competition. A partial refund returned to the buyer after the purchase has been completed, rather than a reduction at point of sale. Price and total revenue move in opposite directions: lowering price increases revenue. Bundling sells multiple products together; tying requires buying one product in order to buy another.

Question 20 Pricing Strategy Fundamentals

What is decoy pricing (asymmetric dominance)?

Minimum Advertised Price — the lowest price a retailer is allowed to advertise for a product. Adding a third, less attractive option to a choice set to push customers toward a higher-priced target option. Offering several product or service packages at different price points, each with progressively more features. A discount that grows as total purchases over a period accumulate, rewarding repeat business.

Question 21 Pricing Strategy Fundamentals

What is high-low pricing?

Demand for a luxury good increases as its price increases, due to its status or conspicuous-consumption appeal. Charging higher regular prices but running frequent promotions and discounts to drive traffic. Maintaining consistently low prices over time instead of relying on frequent promotions. The price at which the quantity supplied equals the quantity demanded.

Question 22 Pricing Strategy Fundamentals

What is MAP pricing?

A price reduction given in exchange for performing a specific activity, such as promoting or displaying the product. Minimum Advertised Price — the lowest price a retailer is allowed to advertise for a product. A price reduction based on the volume purchased. Many substitutes, large share of customer budget, non-essential goods, long time horizon, narrow market definition.

Question 23 Pricing Strategy Fundamentals

What happens to price when supply exceeds demand?

Setting price primarily based on the perceived value to the customer rather than on the cost of production. Produce where marginal revenue equals marginal cost (MR = MC). Price tends to fall until equilibrium is restored. The good is a normal good — demand rises as income rises.

Question 24 Pricing Strategy Fundamentals

What is economy pricing?

A graph showing the relationship between the price of a good and the quantity producers are willing to supply at each price. Pricing adjusted according to the level of customer demand for a product at different times or segments. Keeping prices low by minimizing costs, targeting price-sensitive customers. The set of methods and principles a business uses to set the price of its products or services to achieve specific business objectives.

Question 25 Pricing Strategy Fundamentals

What is second-degree price discrimination?

Charging different prices based on the quantity purchased or the version chosen (e.g. bulk discounts, product tiers). Price tends to rise until equilibrium is restored. (1) Market power, (2) ability to segment the market, (3) prevention of resale between segments. Charging a single fixed price regardless of usage or customer characteristics.

Question 26 Pricing Strategy Fundamentals

What is geographic pricing?

Charging a single fixed price regardless of usage or customer characteristics. Setting prices below cost with the intent of driving competitors out of business, then raising prices later. Price Elasticity = % Change in Quantity Demanded / % Change in Price. Adjusting prices based on the customer's location, region, or country.

Question 27 Pricing Strategy Fundamentals

What is perceived value?

A discount given to channel partners (wholesalers, retailers) off the list price. Break-even Units = Fixed Costs / (Price − Variable Cost per Unit). A reduction from the list price offered to certain customers or under certain conditions. The customer's assessment of a product's worth, based on benefits received versus alternatives available.

Question 28 Pricing Strategy Fundamentals

What is bundle pricing?

Setting prices below cost with the intent of driving competitors out of business, then raising prices later. Price and total revenue move in opposite directions: lowering price increases revenue. Minimum Advertised Price — the lowest price a retailer is allowed to advertise for a product. Selling multiple products or services together as a package at a single combined price.

Question 29 Pricing Strategy Fundamentals

What is a cumulative (loyalty) quantity discount?

The percentage change in quantity demanded of one good divided by the percentage change in price of another good. A discount that grows as total purchases over a period accumulate, rewarding repeat business. Offering a limited number of set price points (e.g. good, better, best) across a product line. The price a manufacturer charges for goods sold to a foreign market.

Question 30 Pricing Strategy Fundamentals

What is predatory pricing?

Many substitutes, large share of customer budget, non-essential goods, long time horizon, narrow market definition. Setting prices below cost with the intent of driving competitors out of business, then raising prices later. Adding a third, less attractive option to a choice set to push customers toward a higher-priced target option. A reduction from the list price offered to certain customers or under certain conditions.

Question 31 Pricing Strategy Fundamentals

What is experience curve pricing?

A surplus develops because quantity supplied exceeds quantity demanded. Price tends to fall until equilibrium is restored. Profit as a percentage of the selling price (as opposed to markup, which is profit as a percentage of cost). Setting prices based on the assumption that costs fall as cumulative production experience grows.

Question 32 Pricing Strategy Fundamentals

What is MSRP?

A surplus develops because quantity supplied exceeds quantity demanded. Manufacturer's Suggested Retail Price — the price a manufacturer recommends a retailer charge. MSRP is a suggested price; MAP is a minimum price the manufacturer requires retailers to advertise. The additional cost incurred by producing one more unit of a product.

Question 33 Pricing Strategy Fundamentals

What is the difference between skimming and penetration pricing?

Skimming starts high and lowers over time to capture premium buyers; penetration starts low to build market share. The price at which the quantity supplied equals the quantity demanded. Pricing the base product low but charging higher prices for necessary add-ons, consumables, or accessories. Fixed costs do not change with output (rent, salaries); variable costs change with output volume (materials, commissions).

Question 34 Pricing Strategy Fundamentals

What is a discount?

Using price points and presentation to influence customer perception, e.g. $9.99 instead of $10. A reduction from the list price offered to certain customers or under certain conditions. Setting prices ending in odd numbers to suggest a bargain, or in even numbers to suggest quality. Pricing the base product low but charging higher prices for necessary add-ons, consumables, or accessories.

Question 35 Pricing Strategy Fundamentals

How does price relate to total revenue when demand is elastic?

The two goods are substitutes (demand for one rises when the other's price rises). Charging customers a recurring fee (weekly, monthly, annually) for continued access to a product or service. Price and total revenue move in opposite directions: lowering price increases revenue. A statistical method that determines how customers value different features of a product, useful for setting feature-based prices.

Question 36 Pricing Strategy Fundamentals

What is subscription pricing?

A discount that grows as total purchases over a period accumulate, rewarding repeat business. The price at which total revenue equals total cost, so profit is zero. Charging customers a recurring fee (weekly, monthly, annually) for continued access to a product or service. Charging customers based on how much of the product or service they actually use.

Question 37 Pricing Strategy Fundamentals

What is marginal revenue?

The additional revenue earned by selling one more unit of a product. Break-even Units = Fixed Costs / (Price − Variable Cost per Unit). Markup = Margin / (1 − Margin). Setting prices just below a round number (e.g. $99.95) to make the price seem significantly lower.

Question 38 Pricing Strategy Fundamentals

What is transfer (FOB) pricing?

Pricing charged between divisions of the same company, often used in international trade. A price reduction based on the volume purchased. Minimum Advertised Price — the lowest price a retailer is allowed to advertise for a product. The good is an inferior good — demand falls as income rises.

Question 39 Pricing Strategy Fundamentals

What is the price-quality heuristic?

A government- or seller-imposed minimum price below which a product cannot be sold. Price and total revenue move in opposite directions: lowering price increases revenue. Price Elasticity = % Change in Quantity Demanded / % Change in Price. A consumer's tendency to assume higher-priced products are of higher quality.

Question 40 Pricing Strategy Fundamentals

What is odd-even pricing?

Charging different prices based on the quantity purchased or the version chosen (e.g. bulk discounts, product tiers). The percentage change in quantity demanded of one good divided by the percentage change in price of another good. Setting prices ending in odd numbers to suggest a bargain, or in even numbers to suggest quality. The price at which total revenue equals total cost, so profit is zero.

Question 41 Pricing Strategy Fundamentals

Name the three conditions required for successful price discrimination.

(1) Market power, (2) ability to segment the market, (3) prevention of resale between segments. A discount that grows as total purchases over a period accumulate, rewarding repeat business. The good is an inferior good — demand falls as income rises. Charging different prices to distinct customer groups (e.g. students, seniors, geographic regions).

Question 42 Pricing Strategy Fundamentals

What is price lining?

Offering a limited number of set price points (e.g. good, better, best) across a product line. The percentage change in quantity demanded divided by the percentage change in consumer income. Setting prices based on the assumption that costs fall as cumulative production experience grows. (1) Market power, (2) ability to segment the market, (3) prevention of resale between segments.

Question 43 Pricing Strategy Fundamentals

What is marginal cost?

Fixed costs do not change with output (rent, salaries); variable costs change with output volume (materials, commissions). Selling a product at a loss (or very low margin) to attract customers who will then buy other, more profitable items. (1) Market power, (2) ability to segment the market, (3) prevention of resale between segments. The additional cost incurred by producing one more unit of a product.

Question 44 Pricing Strategy Fundamentals

What is anchoring in pricing?

The price a customer has in mind based on past purchases, competitors, or context, against which new prices are compared. The cognitive bias where the first price seen heavily influences perception of subsequent prices. Offering several product or service packages at different price points, each with progressively more features. Price per unit minus variable cost per unit — the amount each unit contributes to covering fixed costs and generating profit.

Question 45 Pricing Strategy Fundamentals

What factors make demand more price-elastic?

The additional revenue earned by selling one more unit of a product. (1) Market power, (2) ability to segment the market, (3) prevention of resale between segments. Many substitutes, large share of customer budget, non-essential goods, long time horizon, narrow market definition. Setting price to achieve a specified rate of return on investment at an expected sales volume.

Question 46 Pricing Strategy Fundamentals

What is captive pricing?

Pricing the base product low but charging higher prices for necessary add-ons, consumables, or accessories. Setting prices based on the assumption that costs fall as cumulative production experience grows. A consumer's tendency to assume higher-priced products are of higher quality. A government- or seller-imposed minimum price below which a product cannot be sold.

Question 47 Pricing Strategy Fundamentals

What is yield management?

The price a manufacturer charges for goods sold to a foreign market. Adjusting prices to allocate a fixed, perishable capacity to different customer segments to maximize revenue. Price Elasticity = % Change in Quantity Demanded / % Change in Price. The amount added to cost to set the selling price, expressed as a percentage of cost.

Question 48 Pricing Strategy Fundamentals

What is the experience curve effect?

The observation that unit costs decline by a fixed percentage (e.g. 20-30%) each time cumulative output doubles. Many substitutes, large share of customer budget, non-essential goods, long time horizon, narrow market definition. Skimming starts high and lowers over time to capture premium buyers; penetration starts low to build market share. The price a manufacturer charges for goods sold to a foreign market.

Question 49 Pricing Strategy Fundamentals

What is first-degree (perfect) price discrimination?

Charging each individual customer their maximum willingness to pay. Setting prices based on the assumption that costs fall as cumulative production experience grows. The two goods are substitutes (demand for one rises when the other's price rises). Pricing charged between divisions of the same company, often used in international trade.

Question 50 Pricing Strategy Fundamentals

What is a promotional (sales) discount?

The customer's assessment of a product's worth, based on benefits received versus alternatives available. Using round numbers (e.g. $100, $500) to convey quality and exclusivity. A temporary price reduction used to drive short-term sales or clear inventory. The observation that unit costs decline by a fixed percentage (e.g. 20-30%) each time cumulative output doubles.