ACCA PM · Chapter 7
Pricing decisions MCQs with Answers
10 multiple-choice questions on Pricing decisions for ACCA PM Performance Management. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Phi Co currently sells 2,000 units of a product per month at $100 each. Market research shows that for every $5 increase in price, demand falls by 100 units (and vice versa). The variable cost is $40 per unit and fixed costs are unaffected by volume. In the demand equation P = a - bQ, what is the value of a?
- A) $100
- B) $110
- C) $150
- D) $200
Show answer & explanation
Answer: D) $200
b = change in price / change in quantity = $5 / 100 = 0.05. Substituting P = 100 and Q = 2,000: 100 = a - (0.05 x 2,000), so a = 100 + 100 = $200. This is the price at which demand would fall to zero.
Question 2
Phi Co currently sells 2,000 units of a product per month at $100 each. Market research shows that for every $5 increase in price, demand falls by 100 units (and vice versa). The variable cost is $40 per unit and fixed costs are unaffected by volume. Which equation gives marginal revenue (MR)?
- A) MR = 200 - 0.05Q
- B) MR = 100 - 0.1Q
- C) MR = 200 - 0.1Q
- D) MR = 200 - 0.025Q
Show answer & explanation
Answer: C) MR = 200 - 0.1Q
If P = a - bQ, then MR = a - 2bQ. Here P = 200 - 0.05Q, so MR = 200 - 0.1Q. The MR line has the same intercept as the demand curve but twice the slope.
Question 3
Phi Co currently sells 2,000 units of a product per month at $100 each. Market research shows that for every $5 increase in price, demand falls by 100 units (and vice versa). The variable cost is $40 per unit and fixed costs are unaffected by volume. What is the profit-maximising selling price?
- A) $120
- B) $100
- C) $140
- D) $160
Show answer & explanation
Answer: A) $120
Demand: P = 200 - 0.05Q, so MR = 200 - 0.1Q. Profit is maximised where MR = MC: 200 - 0.1Q = 40, giving Q = 1,600. Price = 200 - (0.05 x 1,600) = $120.
Question 4
Phi Co currently sells 2,000 units of a product per month at $100 each. Market research shows that for every $5 increase in price, demand falls by 100 units (and vice versa). The variable cost is $40 per unit and fixed costs are unaffected by volume. What is the maximum monthly contribution that can be earned?
- A) $120,000
- B) $192,000
- C) $160,000
- D) $128,000
Show answer & explanation
Answer: D) $128,000
Optimal output is 1,600 units at $120 (where MR = MC). Contribution = ($120 - $40) x 1,600 = $128,000, compared with $120,000 at the current price.
Question 5
In which of the following circumstances is a price skimming strategy most appropriate?
- A) The product is new and innovative, and early buyers are prepared to pay a high price
- B) The market is highly price-sensitive and competitors can easily copy the product
- C) The company wants to gain a large market share as quickly as possible
- D) The product is a mature commodity sold in a crowded market
Show answer & explanation
Answer: A) The product is new and innovative, and early buyers are prepared to pay a high price
Price skimming sets a high initial price to exploit customers who value novelty and are not price-sensitive, recovering development costs quickly. It works best where the product is new and differentiated and barriers to entry protect it for a time. Penetration pricing suits price-sensitive markets and rapid share growth.
Question 6
A company launches a new streaming service at a very low monthly price, intending to build a large customer base quickly and discourage competitors from entering. Which pricing strategy is this?
- A) Price skimming
- B) Premium pricing
- C) Complementary product pricing
- D) Penetration pricing
Show answer & explanation
Answer: D) Penetration pricing
Penetration pricing sets a low initial price to win market share quickly, gain economies of scale and deter new entrants. Skimming and premium pricing use high prices, while complementary product pricing links the prices of products that are used together.
Question 7
A company increases the price of its product by 10%, and the quantity sold falls by 25%. Which of the following is correct?
- A) Demand is price elastic and total revenue falls by 17.5%
- B) Demand is price inelastic and total revenue rises by 7.5%
- C) Demand is price elastic and total revenue falls by 15%
- D) Demand is price inelastic and total revenue falls by 17.5%
Show answer & explanation
Answer: A) Demand is price elastic and total revenue falls by 17.5%
Price elasticity of demand = % change in quantity / % change in price = -25% / 10% = -2.5. Its absolute value exceeds 1, so demand is elastic. New revenue = 1.10 x 0.75 = 0.825 of the original, a fall of 17.5%.
Question 8
A product has a full cost of $64 per unit, of which $40 is variable. The company sets prices using full cost plus 25%. What mark-up on variable cost would give the same selling price?
- A) 25%
- B) 100%
- C) 50%
- D) 60%
Show answer & explanation
Answer: B) 100%
Selling price = $64 x 1.25 = $80. Mark-up on variable cost = ($80 - $40) / $40 = 100%.
Question 9
Which of the following conditions is necessary for a price discrimination strategy to be effective?
- A) All customers must have the same price elasticity of demand
- B) The product must be sold at a single price in all markets
- C) The cost of separating the segments must exceed the extra revenue gained
- D) The market can be divided into segments with different price elasticities, and customers cannot easily resell between segments
Show answer & explanation
Answer: D) The market can be divided into segments with different price elasticities, and customers cannot easily resell between segments
Price discrimination charges different prices to different groups for the same product. It only works if segments have different sensitivities to price, if they can be kept apart so low-price buyers cannot resell to high-price buyers, and if the cost of separating them is less than the extra revenue.
Question 10
Chi Co sells 12,000 units per month of a product at $60 each. Each $2 reduction in price would increase demand by 800 units per month. The variable cost is $20 per unit. What is the profit-maximising price?
- A) $60
- B) $45
- C) $55
- D) $50
Show answer & explanation
Answer: C) $55
b = $2 / 800 = 0.0025. a = 60 + (0.0025 x 12,000) = 90, so P = 90 - 0.0025Q and MR = 90 - 0.005Q. Setting MR = MC: 90 - 0.005Q = 20 gives Q = 14,000. Price = 90 - (0.0025 x 14,000) = $55.