Final answer:
A markup is usually expressed as a percentage and represents the addition to the cost of production and desired profit margin to set the price. There is no standard markup as it varies based on many factors including the type of product and market conditions. High markups may lead to higher profits but can also decrease sales volume if prices are too high.
Step-by-step explanation:
The true statement about how firms use markups to set prices is that a markup is usually expressed as a percentage, rather than a dollar amount.
Firms calculate their pricing by factoring in the cost of production, which includes both variable factors like raw materials and fixed expenses like rent and equipment. On top of this, they add a desired profit margin. The sum of these factors determines the price at which a product is offered to the market. It is important to understand that while a high markup can contribute to high profits, it is not guaranteed as it can also affect sales volume if the price is too high for consumers.
The concept of a "standard markup" is misleading because firms may set different markups based on the type of product, competitive strategy, and overall market conditions. Therefore, there isn't a one-size-fits-all markup, and each firm must analyze its cost structure and market to determine the best pricing strategy.