Question 1

A retailer is considering increasing the price of one of her products. She currently sells 80units per week of this product at $30.00 a piece, and her variable costs for the product are $13.50. A market research study has indicated that, for this product, consumers will show a price elasticity of -1.8 to price changes that they perceive. For price changes that are too small for the consumer to notice, their price elasticity will be 0. The study has indicated that only 50 percent of the retailer's market is aware of the current price for this product. The other 50 percent knows only that the product's current price is somewhere between $22 and $38.

(a) What is the breakeven sales level for a $5 price increase for this product?

(b) Use the price-change response information given in the problem to calculate whether or not this $5 price increase would be profitable for the retailer.

Question 2

A retailer of lawnmowers is considering changing the prices of some of his products. A pricing consultant advises him to consider the IRPs of the consumers in his market.

(a) Formulate a survey question that the retailer could use to measure consumers' IRPs.

(b) Assume that the retailer is currently selling a particular lawnmower for $269. If the retailer's research determines that the IRP of most consumers for this lawnmower is the range from $250 to $299, what are the implications of knowing this for possible price changes on this product?

Question 3

For which of the following product categories would you expect consumers to be most likely to use price as a cue to quality: a plastic garbage can, an in-home electronic air cleaner, or a bottle of multiple vitamins? Explain your reasoning.

Question 4

A large home improvement retailer has run an advertisement for a particular brand-name titanium drill bit set. The headline of the ad is "Was $19.97 - Now Only $14.97!"

(a) What is the external reference price that is mentioned in this ad?

(b) Assume that the external reference price mentioned in this ad causes the advertised selling price (i.e., the price at which the item is being sold) to be perceived by consumers as a loss and a gain. Assuming this, give an example of what that consumer's IRP would have to be.

(c) Given the assumption of Part (b) and the IRP that you gave as an example, what would be the dollar size of the loss that the consumer

perceives? What would be the dollar size of the gain that the consumer perceives? Briefly explain your reasoning.

Question 5

Consider the college that has two prices for its services. It charges list price (full tuition) to only a small portion of their students. Everyone else gets a discount (scholarship). This college does not set a low list price and charge a tuition premium to those few individuals who are not star students, athletes, or from low-income backgrounds.

(a) Assume that the two prices are framed in terms of full tuition and scholarships. In terms of perceived gains and losses, describe how students who receive scholarships and those who do not receive scholarships are likely to perceive the price that they pay for college.

(b) Assume that the two prices are framed in terms of low list price and a tuition premium. In terms of perceived gains and losses, describe how students who pay the low list price and those pay the tuition premium are likely to perceive the price that they pay for college.

(c) Using what you know about the value of perceived gains and losses, explain why the college prefers to frame its two prices in terms of scholarships rather than in terms of tuition premiums.