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Describe each of the primary methods used for setting price

Describe each of the primary methods used for setting price, explaining its applications, strengths and weaknesses, show the formula and calculate an example for each method.
1) Pricing using demand estimation (MR=MC)
Linear Approximation Method (How does one do this?)
2)Cost-Plus Pricing
Breakeven Analysis
3)Mark-Up Pricing
Targeted Returns
Using Elasticity Estimates to find optimal mark-up

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1) Pricing using demand estimation (MR=MC)
Linear Approximation Method (How does one do this?)

Pricing using demand estimation means setting up optimal price where Marginal Revenue= Marginal Cost. It takes into account demand and cost estimations for arriving at an optimal price. Demand can be derived at by looking at historical estimates, current pricing, discounts, coupons, etc.

Demand estimation is commonly done for short-run sales forecasting, marketing, pricing, and market placement analysis. Three common methods used for demand estimation include:

Consumer Interviews: Survey consumers, or potential consumers, to get their anticipated responses to questions regarding how their purchase decision may be influenced by variation in the product's price, the price of rival (substitute) goods and complementary goods, as well as in their own incomes.

Market Experiments: Test markets may be actual, such as 'representative' cities like Peoria Illinois or Spokane Washington, or 'laboratory' markets in which representative consumers are brought in under simulated market conditions.

Regression Analysis: One begins by constructing the estimating equation, such as a demand function, then gathers data and estimates the coefficients of the equation that tell us the marginal effects of each individual variable on sales quantity. Regression analysis can be used in conjunction with data-gathering market experiments. A ...

Solution Summary

Describe each of the primary methods used for setting price, explaining its applications, strengths and weaknesses, show the formula and calculate an example for each method.

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