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Question 1.

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?



Question 2.

Why might an amusement park switch from charging admission to the park and charging for the rides to charging for admission but not charging for the rides?

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Answer 1

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.



Answer 2

An amusement park would switch pricing strategies if it thought the new pricing strategy would increase revenues and profits. The switch could possibly reduce the costs of collecting revenue as well because tickets do not have to be collected at the entrance to each ride.

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