Question

Let's also explain how using master budget capacity utilization for setting prices can lead to a downward demand spiral.

Answer 1

Downward demand spiral occurs when there is an increase in overhead costs but the production is at the same stage or else the production is reduced too.

Using master budget capacity utilisation for setting prices will defined increase the costs of overhead, because it is definitely the increased overhead cost. And as a result there will occur a downward demand spiral. Inorder to understand this concept clearly the above both concepts should be understood to their core.