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# Marginal analysis is an important decision-making tool

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Marginal analysis is an important decision-making tool  [#permalink]

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03 Jun 2018, 04:15
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Marginal analysis is an important decision-making tool in the business world. Pricing decisions tend to heavily involve analysis regarding marginal contributions to revenues and costs. In business, the practice of setting the price of a product to equal the extra cost of producing an extra unit of output, i.e. the marginal cost of producing the unit, is known as marginal-cost pricing. In the marginal analysis of pricing decisions, if marginal revenue, the increase in revenue from the sale of an additional unit of output, is greater than marginal cost at some level of output, marginal profit is positive, and, therefore, a greater quantity should be produced. Alternatively, if marginal revenue is less than the marginal cost, marginal profit is negative and a lesser quantity should be produced. Accordingly, firms tend to use this analysis to increase their production until marginal revenue equals marginal cost, and then charge a price which is determined by the demand curve. For instance, businesses often set prices close to marginal cost during periods of poor sales. If, for example, an item has a marginal cost of \$1.00 and a normal selling price of \$2.00, the firm selling the item might wish to lower the price to \$1.10 - if demand has waned. The business would choose this approach because the incremental profit of 10 cents from the transaction is better than no sale at all.

1. Which of the following best describes the primary purpose of the author?
A. To explain how companies change prices, using the market conditions as an indicator
B. To discuss the use of a business tool in a particular context
C. To establish the supremacy of a price-setting tool in the business world
D. To advocate for the use of a business concept in determining prices
E. To discuss the various tools available to a company to alter the prices of its products during lean periods

2. Which of the following is supported by the information given in the passage?
A. Marginal cost pricing is employed when even though the demand is on the rise, the sales are not.
B. The normal selling price of a product is not as affected by the demand of the product as the price set close to the marginal cost of the product.
C. As companies realize economies of scale, the marginal cost of producing decreases with each extra unit produced.
D. Companies are likely to shut down when they cannot even command a price that is identical to the marginal cost of their product.
E. Setting the price close to the marginal cost is sometimes a question of relative benefit.

3. Which of the following is stated in the passage?
A. The level of output produced is sometimes determined by taking in to account the difference between marginal revenue and marginal cost
B. Marginal analysis is the most important tool through which the pricing of a product is decided.
C. The normal selling price of a product is usually close to the marginal cost of the product.
D. Profit from an additional unit of output decreases with every increase in production.
E. Marginal cost pricing is a technique used in the short run rather than in the long run.

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Re: Marginal analysis is an important decision-making tool  [#permalink]

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03 Jun 2018, 06:09
3
Total time taken: 4 mins, all 3 correct.

Lets break the passage:
Imp and applicability of MA.
Defn of MA
When is MProfit +ve
When is MProfit -ve
Market strategy for minimal profit vs no profit at all, examples.

1. Which of the following best describes the primary purpose of the author?
A. To explain how companies change prices, using the market conditions as an indicator
--> this is discussed only in last line.

B. To discuss the use of a business tool in a particular context
--> Correct.

C. To establish the supremacy of a price-setting tool in the business world
--> author no where says that this tool is the best/ supreme.

D. To advocate for the use of a business concept in determining prices
--> passage is not advocating anything.

E. To discuss the various tools available to a company to alter the prices of its products during lean periods
--> only one tool is discussed, MA

2. Which of the following is supported by the information given in the passage?
A. Marginal cost pricing is employed when even though the demand is on the rise, the sales are not.
--> opposite is true

B. The normal selling price of a product is not as affected by the demand of the product as the price set close to the marginal cost of the product.
--> It is affected. Last line says this.

C. As companies realize economies of scale, the marginal cost of producing decreases with each extra unit produced.
--> extreme.

D. Companies are likely to shut down when they cannot even command a price that is identical to the marginal cost of their product.
--> extreme

E. Setting the price close to the marginal cost is sometimes a question of relative benefit.
--> Correct. rephrased version of last line

3. Which of the following is stated in the passage?
A. The level of output produced is sometimes determined by taking in to account the difference between marginal revenue and marginal cost
--> Correct. See the desc of MProfit +ve / -ve.

B. Marginal analysis is the most important tool through which the pricing of a product is decided.
--> Not "most" imp.

C. The normal selling price of a product is usually close to the marginal cost of the product.
--> not necessary
D. Profit from an additional unit of output decreases with every increase in production.

E. Marginal cost pricing is a technique used in the short run rather than in the long run.

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Re: Marginal analysis is an important decision-making tool  [#permalink]

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20 Dec 2018, 21:43

+1 kudos to the posts containing answer explanations of all questions

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Marginal analysis is an important decision-making tool  [#permalink]

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20 Dec 2018, 22:40
1
Skywalker18 wrote:
Marginal analysis is an important decision-making tool in the business world. Pricing decisions tend to heavily involve analysis regarding marginal contributions to revenues and costs. In business, the practice of setting the price of a product to equal the extra cost of producing an extra unit of output, i.e. the marginal cost of producing the unit, is known as marginal-cost pricing. In the marginal analysis of pricing decisions, if marginal revenue, the increase in revenue from the sale of an additional unit of output, is greater than marginal cost at some level of output, marginal profit is positive, and, therefore, a greater quantity should be produced. Alternatively, if marginal revenue is less than the marginal cost, marginal profit is negative and a lesser quantity should be produced. Accordingly, firms tend to use this analysis to increase their production until marginal revenue equals marginal cost, and then charge a price which is determined by the demand curve. For instance, businesses often set prices close to marginal cost during periods of poor sales. If, for example, an item has a marginal cost of \$1.00 and a normal selling price of \$2.00, the firm selling the item might wish to lower the price to \$1.10 - if demand has waned. The business would choose this approach because the incremental profit of 10 cents from the transaction is better than no sale at all.
1. Which of the following best describes the primary purpose of the author?
A. To explain how companies change prices, using the market conditions as an indicator
B. To discuss the use of a business tool in a particular context
C. To establish the supremacy of a price-setting tool in the business world
D. To advocate for the use of a business concept in determining prices
E. To discuss the various tools available to a company to alter the prices of its products during lean periods

2. Which of the following is supported by the information given in the passage?
A. Marginal cost pricing is employed when even though the demand is on the rise, the sales are not.
B. The normal selling price of a product is not as affected by the demand of the product as the price set close to the marginal cost of the product.
C. As companies realize economies of scale, the marginal cost of producing decreases with each extra unit produced.
D. Companies are likely to shut down when they cannot even command a price that is identical to the marginal cost of their product.
E. Setting the price close to the marginal cost is sometimes a question of relative benefit.

3. Which of the following is stated in the passage?
A. The level of output produced is sometimes determined by taking in to account the difference between marginal revenue and marginal cost
B. Marginal analysis is the most important tool through which the pricing of a product is decided.
C. The normal selling price of a product is usually close to the marginal cost of the product.
D. Profit from an additional unit of output decreases with every increase in production.
E. Marginal cost pricing is a technique used in the short run rather than in the long run.

-------------------------------------------------
1. Which of the following best describes the primary purpose of the author?
A. To explain how companies change prices, using the market conditions as an indicator
B. To discuss the use of a business tool in a particular context => The passage discuss about the marginal analysis and its effects on business practice.
C. To establish the supremacy of a price-setting tool in the business world
D. To advocate for the use of a business concept in determining prices
E. To discuss the various tools available to a company to alter the prices of its products during lean periods

2. Which of the following is supported by the information given in the passage?
A. Marginal cost pricing is employed when even though the demand is on the rise, the sales are not.
B. The normal selling price of a product is not as affected by the demand of the product as the price set close to the marginal cost of the product.
C. As companies realize economies of scale, the marginal cost of producing decreases with each extra unit produced.
D. Companies are likely to shut down when they cannot even command a price that is identical to the marginal cost of their product.
E. Setting the price close to the marginal cost is sometimes a question of relative benefit. => If, for example, an item has a marginal cost of \$1.00 and a normal selling price of \$2.00, the firm selling the item might wish to lower the price to \$1.10 - if demand has waned. The business would choose this approach because the incremental profit of 10 cents from the transaction is better than no sale at all

3. Which of the following is stated in the passage?
A. The level of output produced is sometimes determined by taking in to account the difference between marginal revenue and marginal cost=> In the marginal analysis of pricing decisions, if marginal revenue, the increase in revenue from the sale of an additional unit of output, is greater than marginal cost at some level of output, marginal profit is positive, and, therefore, a greater quantity should be produced. Alternatively, if marginal revenue is less than the marginal cost, marginal profit is negative and a lesser quantity should be produced.
B. Marginal analysis is the most important tool through which the pricing of a product is decided.
C. The normal selling price of a product is usually close to the marginal cost of the product.
D. Profit from an additional unit of output decreases with every increase in production.
E. Marginal cost pricing is a technique used in the short run rather than in the long run.[/box_in][/box_out][/quote]
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Re: Marginal analysis is an important decision-making tool  [#permalink]

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20 Dec 2018, 23:09
2
4 mins 55 sec... All correct.

MP - Marginal analysis is an important decision-making tool in the business world. In business, the practice of setting the price of a product to equal the extra cost of producing an extra unit of output, i.e. the marginal cost of producing the unit, is known as marginal-cost pricing. Marginal profit decides the level of output & also the demand - if demand is low, company will bring down the cost such that marginal profit is minimum. However, if marginal profit is negative,company will lower output ( as it is a loss to continue at the earlier level)

Q1 - Need to understand the MP for this. Also, the tone of the author is important.

1. Which of the following best describes the primary purpose of the author?
A. To explain how companies change prices, using the market conditions as an indicator Detailed - plus "companies" are not shown to do anything as such just a business tool is explained
B. To discuss the use of a business tool in a particular context Correct - also the tone of author is neutral and hence it is correct to use the term "discuss"
C. To establish the supremacy of a price-setting tool in the business world Pure non-sense
D. To advocate for the use of a business concept in determining prices TRAP - "advocate" is too strong a word as the author is showing a neutral tone
E. To discuss the various tools available to a company to alter the prices of its products during lean periods BS option- only one tool is discussed

Q2 - INFERENCE TYPE - need to ensure 100% support for statement by passage

2. Which of the following is supported by the information given in the passage?
A. Marginal cost pricing is employed when even though the demand is on the rise, the sales are not. Opposite is true
B. The normal selling price of a product is not as affected by the demand of the product as the price set close to the marginal cost of the product. Opposite again!
C. As companies realize economies of scale, the marginal cost of producing decreases with each extra unit produced. Real world trap - this could be true in the real world but the passage does not mention this explicitely
D. Companies are likely to shut down when they cannot even command a price that is identical to the marginal cost of their product. Opposite - companies will bring down output
E. Setting the price close to the marginal cost is sometimes a question of relative benefit. Correct - mentioned in the passage when the \$2 brought down to \$1.10 example is given

Q3 - Detail type question also - inference type as we are looking for something explicitely mentioned in the passage but being paraphrased by the option choices

3. Which of the following is stated in the passage?

A. The level of output produced is sometimes determined by taking in to account the difference between marginal revenue and marginal cost Bingo! - This is the Main point of the passage and is mentioned in the first part itself
B. Marginal analysis is the most important tool through which the pricing of a product is decided. "Most important" too extreme given the tone of the author
C. The normal selling price of a product is usually close to the marginal cost of the product. Opposite - already used in q1
D. Profit from an additional unit of output decreases with every increase in production. Not true - depends on the demand as well as the current level of output
E. Marginal cost pricing is a technique used in the short run rather than in the long run. Not mentioned in the passage

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Re: Marginal analysis is an important decision-making tool  [#permalink]

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21 Dec 2018, 11:10
1
1. Which of the following best describes the primary purpose of the author?
A. To explain how companies change prices, using the market conditions as an indicator - Out of scope. Author used this to establish the point.
B. To discuss the use of a business tool in a particular context - That is the whole summary of the passage.
C. To establish the supremacy of a price-setting tool in the business world - out of scope
D. To advocate for the use of a business concept in determining prices - out of scope. Author is not advocating anything
E. To discuss the various tools available to a company to alter the prices of its products during lean periods - Inconsistent. Only a single tool is discussed.

2. Which of the following is supported by the information given in the passage?
A. Marginal cost pricing is employed when even though the demand is on the rise, the sales are not. - opposite
B. The normal selling price of a product is not as affected by the demand of the product as the price set close to the marginal cost of the product. - opposite
C. As companies realize economies of scale, the marginal cost of producing decreases with each extra unit produced. - opposite
D. Companies are likely to shut down when they cannot even command a price that is identical to the marginal cost of their product. - Out of scope.
E. Setting the price close to the marginal cost is sometimes a question of relative benefit. - This is explained in the last lines

3. Which of the following is stated in the passage?
A. The level of output produced is sometimes determined by taking in to account the difference between marginal revenue and marginal cost - stated in the passage.
B. Marginal analysis is the most important tool through which the pricing of a product is decided. - extreme
C. The normal selling price of a product is usually close to the marginal cost of the product. - opposite
D. Profit from an additional unit of output decreases with every increase in production. - opposite
E. Marginal cost pricing is a technique used in the short run rather than in the long run. - out of scope
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Re: Marginal analysis is an important decision-making tool  [#permalink]

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21 Dec 2018, 12:36
best way to do the 3rd question in time?
Which of the following is stated in the passage?
it is a detail question so do we have to read the passage everytime for every option?
Re: Marginal analysis is an important decision-making tool   [#permalink] 21 Dec 2018, 12:36
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