Which of the following best describes how target pricing is executed in a market with price controls?

• A. Firms set prices based on desired profit margins and estimated costs, regardless of government-imposed price ceilings or floors.
• B. Firms determine the price consumers are willing to pay, then design products and control costs to achieve profitability at that target price.
• C. Firms use auctions to discover the highest price consumers will pay, then set that as the target price.
• D. The government sets a fixed price for goods, and firms must adjust their production to meet this price.

Answer: (B)

Verified step by step guidance

1. Understand the concept of target pricing: it involves firms starting with the price consumers are willing to pay and then working backward to design products and control costs to achieve profitability at that price.
2. Recognize that in markets with price controls, such as price ceilings or floors, firms cannot simply set prices based on desired profit margins and estimated costs because the government restricts the price range.
3. Identify that the correct approach under price controls is for firms to determine the target price (the price consumers are willing to pay within the controlled limits) and then adjust their production processes and costs accordingly.
4. Eliminate options that involve ignoring government price controls or relying on auctions, as these do not align with the concept of target pricing under regulated prices.
5. Conclude that the best description of target pricing under price controls is: firms determine the price consumers are willing to pay, then design products and control costs to achieve profitability at that target price.