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Normally, businesses operate at a profit. In other words, they sell th

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Normally, businesses operate at a profit. In other words, they sell th  [#permalink]

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New post 13 Jul 2018, 02:41
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Normally, businesses operate at a profit. In other words, they sell their products to customers for more money than the products initially cost. This pricing structure permits businesses to sustain themselves over time. The Stop and Go Supermarket, however, sells its milk for less money than it costs.

Which of the following, if true, would best explain why the pricing structure for milk makes economic sense for Stop and Go?


A. Stop and Go directly competes with several lower-priced markets and feels it must match their prices in order to keep its customers.

B. Because Stop and Go does not carry premier brands of milk, it feels an obligation to sell its lesser brands at a loss.

C. Milk is a commodity good, and Stop and Go believes all of its customers deserve the right to purchase commodity goods at reasonable prices.

D. Low prices for milk attract large numbers of customers to the store, and these customers purchase many additional profitable items.

E. Stop and Go owns the dairy where the milk is produced, and the dairy makes a profit on the milk even though Stop and Go loses money.

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Re: Normally, businesses operate at a profit. In other words, they sell th  [#permalink]

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New post 13 Jul 2018, 03:11
Bunuel wrote:
Normally, businesses operate at a profit. In other words, they sell their products to customers for more money than the products initially cost. This pricing structure permits businesses to sustain themselves over time. The Stop and Go Supermarket, however, sells its milk for less money than it costs.


Pre-thinking :
To resolve the paradox given above, we need to be on a lookout for the option that says the pricing strategy of Stop and Go Supermarket may seem to incur loss, but on a closer look it may be a tactic to attract more customer, resulting to more profit in near future

D. Low prices for milk attract large numbers of customers to the store, and these customers purchase many additional profitable items. --> Correct, matches our pre-thinking

Hence, D.
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Normally, businesses operate at a profit. In other words, they sell th  [#permalink]

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New post 13 Jul 2018, 10:46
Bunuel wrote:
Normally, businesses operate at a profit. In other words, they sell their products to customers for more money than the products initially cost. This pricing structure permits businesses to sustain themselves over time. The Stop and Go Supermarket, however, sells its milk for less money than it costs.

Which of the following, if true, would best explain why the pricing structure for milk makes economic sense for Stop and Go?


A. Stop and Go directly competes with several lower-priced markets and feels it must match their prices in order to keep its customers.

B. Because Stop and Go does not carry premier brands of milk, it feels an obligation to sell its lesser brands at a loss.

C. Milk is a commodity good, and Stop and Go believes all of its customers deserve the right to purchase commodity goods at reasonable prices.

D. Low prices for milk attract large numbers of customers to the store, and these customers purchase many additional profitable items.

E. Stop and Go owns the dairy where the milk is produced, and the dairy makes a profit on the milk even though Stop and Go loses money.




Let’s break the argument and try to analyze it in bits and pieces.

General Fact:
Businesses operate at a profit.
Profit = Selling Price – Cost Price
Pricing structure helps businesses to sustain
However: Below info will present a contrast to above
At Stop and Go Supermarket:
For Milk only: Selling Price < Cost Price.
Therefore, profit for milk is in negative.

Which of the following, if true, would best explain why the pricing structure for milk makes economic sense for Stop and Go?:
So, basically, the question is asking why does it make sense for Stop and Go to sell milk at a less price than cost, considering various factors such as product, quantity, price, customer, market etc.?

What do you think?

Being an MBA aspirant, and based on the given fact that businesses operates at profit, I believe that Stop and Go must be making profit through other means (something related to milk) even though it makes loss on milk.

Let’s check the answer choices now -

A. Stop and Go directly competes with several lower-priced markets and feels it must match their prices in order to keep its customers. – Okay. But what’s the limit on lowering the prices? Can the selling price be less than cost price? If yes, where the profit comes from? Remember, ultimately it is the profit which makes a business sustainable.

B. Because Stop and Go does not carry premier brands of milk, it feels an obligation to sell its lesser brands at a loss. - Okay. If I don’t have a premier brand, am I obliged to sell at lesser price and end up making negative profits? In this case, the sustainability of my business goes for a toss.

C. Milk is a commodity good, and Stop and Go believes all of its customers deserve the right to purchase commodity goods at reasonable prices. – Reasonable price doesn’t mean it has to be less than cost price.

D. Low prices for milk attract large numbers of customers to the store, and these customers purchase many additional profitable items. - Oh! I see. So, this is the business model of Stop and Go. Make the loss on milk but make profits on many other items that are sold to the same customers who come to store mainly to buy milk by seeing low price. Ultimately, Stop and Go is making overall profit and the business is sustainable.

E. Stop and Go owns the dairy where the milk is produced, and the dairy makes a profit on the milk even though Stop and Go loses money. - How does dairy make profit? By selling it to Stop and Go? So, the dairy can sustain but what will happen to Stop and Go that does not make any profit?
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Re: Normally, businesses operate at a profit. In other words, they sell th  [#permalink]

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New post 18 Jul 2018, 08:56
Bunuel wrote:
Normally, businesses operate at a profit. In other words, they sell their products to customers for more money than the products initially cost. This pricing structure permits businesses to sustain themselves over time. The Stop and Go Supermarket, however, sells its milk for less money than it costs.

Which of the following, if true, would best explain why the pricing structure for milk makes economic sense for Stop and Go?


A. Stop and Go directly competes with several lower-priced markets and feels it must match their prices in order to keep its customers.

B. Because Stop and Go does not carry premier brands of milk, it feels an obligation to sell its lesser brands at a loss.

C. Milk is a commodity good, and Stop and Go believes all of its customers deserve the right to purchase commodity goods at reasonable prices.

D. Low prices for milk attract large numbers of customers to the store, and these customers purchase many additional profitable items.

E. Stop and Go owns the dairy where the milk is produced, and the dairy makes a profit on the milk even though Stop and Go loses money.



Close call between D and E. But D seems more logical in daily life example.

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Re: Normally, businesses operate at a profit. In other words, they sell th &nbs [#permalink] 18 Jul 2018, 08:56
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