Question

The big problem with average-cost pricing is that:A. fixed costs are hard to estimate.

B. it ignores the firm's demand curve.
C. it doesn't consider the effect of variable costs.
D. there is no way to include a desired profit per unit.
E. None of the above is true.

Answer 1

B. it ignores the firm's demand curve.

Step-by-step explanation:

A: With the help of average cost pricing, the fixed cost can quickly estimate. Therefore, it cannot be the answer.

C: The average cost must consider the effect of variable cost. Therefore, it is also the wrong statement.

D: It is easy to estimate profit if there is an average cost pricing.

B: average-cost pricing always ignores the demand curve because it is a "U" shaped curve. Because after a certain level of product selling, the average cost is increasing. On the other hand, demand curve is such that if the price decreases, the quantity demanded increases. Therefore, it is a downward slopping curve. Hence, it is understood that, average-cost pricing ignores demand curve.