Question

5. What is the cost-based approach?

a. What exactly is measured under the cost-based approach? Be specific as possible.

b. What data did economists have available to them in this case? What economic concept did they measure using this data?

c. What assumptions were made? How were the assumptions defended?

Answer 1

Cost based approach

1. The selling price of a product by a company is determined in the cost based pricing method. The price of the product is determined by adding the profits with the cost of making the product.
2. The selling price of a product is measured under the cost based approach.
3. The data available to the economist are the price of the product, the demand for the product, the profit of the product. Using these data the value based pricing and cost based pricing is measured.
4. The basic assumption is that there is not insufficient supply of land for the producers to do any sort of construction. The cost approach gives the best indication of the market value of any product.