Cost-plus pricing occurs when:

• A. a firm sets the price equal to the marginal cost of production
• B. a firm sets the price at the equilibrium point where supply equals demand
• C. a firm sets the price by adding a fixed percentage or amount to its average cost of production
• D. a firm sets the price based solely on consumer demand

Answer: (C)

Verified step by step guidance

1. Understand the concept of cost-plus pricing: it is a pricing strategy where a firm determines the price by adding a specific markup (a fixed percentage or amount) to the average cost of production.
2. Recall that marginal cost pricing means setting the price equal to the marginal cost of producing one more unit, which is different from cost-plus pricing.
3. Recognize that equilibrium pricing occurs where the supply curve intersects the demand curve, which is a market-determined price, not a cost-plus method.
4. Note that pricing based solely on consumer demand ignores production costs and is not related to cost-plus pricing.
5. Conclude that cost-plus pricing specifically involves calculating the average cost per unit and then adding a predetermined markup to set the final price.