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Automobile manufacturers commonly sell new car models at the full suggested retail price during the first few years the car is on the market, without offering rebates or discounts. After the initial sales period, they typically provide rebates or discounts on these models. The marginal cost of manufacturing the cars remains constant over time. Which of the following statements is true?

A) The price of the cars is determined solely by their marginal cost.

B) The price of the cars is determined by the demand and supply dynamics in the market.

C) The manufacturers use a skimming pricing strategy initially and then switch to a penetration pricing strategy.

D) The manufacturers use a cost-plus pricing strategy to set the initial prices.

Answer :

Final answer:

The manufacturers initially use a skimming pricing strategy, selling cars at full retail price, and later switch to a penetration pricing strategy, offering discounts or rebates, as market saturation occurs. Prices are not determined purely by marginal cost, but also by market dynamics and the chosen pricing strategy.

Explanation:

In the scenario presented in the question, it's clear that the price of the cars is not solely determined by their marginal cost (Statement A), rather it is influenced by market dynamics (Statement B) and by the pricing strategy adopted by the manufacturers (Statements C and D).Considering the skimming and penetration pricing strategies described, the manufacturers initially use a skimming pricing strategy when the car model is new and demand is high, thus selling at the full suggested retail price. As the model becomes more mature and market saturation begins to occur, they switch to a penetration pricing strategy, offering rebates or discounts to attract more buyers (Statement C is true). This is not a cost-plus pricing strategy (Statement D is false) as the price is not determined by adding a mark-up to the constant marginal cost of productionSo, the final answer is: The manufacturers use a skimming pricing strategy initially and then switch to a penetration pricing strategy.

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