Final answer:
Cost-plus pricing strategy involves adding a fixed markup to the production cost, aiming to cover all costs and achieve the desired profit. Cost-plus regulation is a form of government oversight that allows firms to set prices by covering accounting costs plus a profit margin. However, this can reduce cost-saving incentives for firms.
Step-by-step explanation:
The correct answer to the student's question is option b). Cost-plus pricing is a pricing strategy that adds a fixed markup to the cost of production. This markup covers the costs incurred during the production process as well as the desired profit margin for the company. Unlike other pricing strategies, cost-plus pricing does not primarily adjust based on factors such as customer demand (option c) or competitors' rates (option a), but is instead focused on ensuring that all costs are covered and a set profit is achieved with each sale.
Cost-plus regulation involves government intervention, where a firm's pricing is regulated by adding a normal rate of profit on top of the accounting costs. On the other hand, price cap regulation is where the government sets a maximum price level in advance, and the firm's profitability depends on its ability to manage costs and sales volume.
It is important to note that while cost-plus pricing ensures that all costs are covered, it can also lead to inefficiencies. This is because firms may have less incentive to keep costs low, since higher costs can simply be passed on to the consumer in the form of higher prices. Moreover, firms might even have an incentive to inflate costs to increase the price they can charge under cost-plus regulation.