Explanation:
Statement B is FALSE (and therefore the correct answer). The marginal cost approach does not seek to maximize the absolute amount of deposits or total revenue. Instead, its goal is to maximize profits by continuing to attract deposits only up to the point where the marginal cost of acquiring an additional dollar of deposits equals the marginal revenue generated by investing that dollar.
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20.13.2. In pricing deposit services, financial managers are faced with an old dilemma. The institution must pay a high enough interest to keep customers happy and to attract new customers, while at the same time not paying too high an interest rate that it erodes the firm’s expected profit margin. Rose and Hudgins review four different methods a bank can use to determine the pricing of deposits: cost-plus, marginal cost, conditional pricing, and relationship pricing. In regard to these approaches, each of the following summaries is accurate (TRUE) EXCEPT which statement is inaccurate (FALSE)?
A
The cost-plus approach requires the careful allocation of operating, overhead and other fixed costs
B
The marginal cost approach, in theory, should maximize the amount of deposits attracted and therefore generate the highest revenue and interest income
C
The conditional pricing approach varies deposit prices (i.e., offered interest rate) based on number of transactions, average balance, and/or maturity of deposits
D
The relationship pricing approach offers lower fees and/or higher interest rates to customers who use a greater number of bank services
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