Question

How important the cost function in the process of production and pricing strategy?

Answer 1

Cost plays a very significant role in both the production and the pricing strategy.

Production involves investment. It requires money to run a business or to produce goods and services. Cost function includes both the fixed and the variable cost.

Until and unless cost is known, the pricing strategy cannot be decided because the profits that would be earned would depend upon the cost involved. This is so because profit is the difference between the revenue earned and cost incurred.