Pricing Strategies: A business can produce its product in different versions: Ve

Question

Pricing Strategies:

A business can produce its product in different versions: Version A has a basic design and a lower cost and Version B has an upgraded design and a higher cost of production. The business knows there are different types of customers, “High” demand (H) and “Low” demand (L), but cannot separate the different types of customers. The number of customers of each type and the maximum each type is willing to pay for the different versions of the product are illustrated in the table. In addition, the table gives the marginal cost of production for each version of the product.

Version A

Version B

Marginal Cost

1.) Assume the business offers the product in Version A only. Determine the optimal price (Pa*) and compute the profit of the business.

2.) Assume the business offers the product in Version A and Version B. Determine the optimal prices (Pa*and Pb*) and compute the profit of the business.

NOTE: Show all work and all steps to arrive at your answer for credit.

Version A

Version B

Marginal Cost

Explanation / Answer

1)if business offers the product in Version A only, the optimal price (Pa*) and the profit of the business could be either H or L because profits earned are the same = 1000, (30-10)*50 or (20-10)*100

2) if the business offers the product in Version A and Version B, the optimal prices (Pa*and Pb*) and the profit of the business is H as profits are higher i.e. 1000 + 1250=(45-20)*50

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