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Which of the following is true of full-cost pricing? Full-cost pricing uses the marginal cost of...

Which of the following is true of full-cost pricing?

  • Full-cost pricing uses the marginal cost of a product as its base. (this one is wrong)
  • Since fixed costs do not affect optimal price and quantity, full-cost pricing is error-prone (probably this is the answer)
  • Firms that use full-cost pricing are producing at the optimum level of output.
  • Full-cost pricing is based on the markup of price over average variable cost.
  • Full-cost pricing takes into account the price elasticity of demand for the product.
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Homework Answers

Answer #1

Option B.

  • Full cost pricing is a form of pricing strategy adopted by firms wherein the price of any product is calculated by adding the direct costs of material, labour, other overhead costs etc. Plus the markup price divided by the total number of units to be sold.
  • It does not include fixed costs as costs are calculated directly and may change for different number of units of a good expected to sell.
  • Hence, as fixed costs does not affect optimal price and quantity, full cost pricing is error prone.
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