Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What shape does the cost-plus pricing approach curve exhibit?

1. Vertical supply curve

2. Horizontal supply curve

3. Upward sloping supply curve

4. Downward sloping supply curve

The correct answer is: Horizontal supply curve

The cost-plus pricing approach typically results in a horizontal supply curve. This is because in this pricing method, prices are determined by adding a fixed markup to the cost of production. As a result, the price remains constant at a certain level regardless of the quantity supplied. In a perfectly competitive market, firms set their prices based on their costs, and since they are unable to influence the market price significantly, they will supply whatever quantity is demanded at that price. This characteristic demonstrates that the supply does not react to changes in price, which is why the curve appears horizontal. It suggests that suppliers will produce any quantity at the set price, as they believe it covers the costs and provides the desired profit margin. Thus, this approach essentially implies that the market will absorb various quantities at a single price point, making the horizontal curve the fitting representation.