these prices, EZ Sharp is selling 3,750 units of the Classic model per month and 2,000
units of the Professional model per month.
$30
AVC
P
SMC
P
$20
AVC
C
SMC
C
10
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0
20
30
40
50
60
70
80
90
100
Quantity (thousands of units)
Price and cost (dollars)
MC
MR
B
MR
S
120
D
S
D
B
110
C H A P T E R 14
Advanced Pricing Techniques
619
P
R
I
C
E
,
L
A
M
O
N
I
C
A
2
7
2
9
B
U

a.
Using the cost-plus technique, compute the prices the owner-manager charges for the
Classic and the Professional models, based on his required 200 percent profit margin.
b.
How much profit is EZ Sharp earning each month using the cost-plus prices in
part
a
?
The owner–manager is ready to sell the firm, but he knows the value of the firm will
increase if he can increase the monthly profit somehow. He decides to hire Andrews
Consulting to recommend ways for EZ Sharp to increase its profits. Andrews reports
that production is efficient, but pricing can be improved. Andrews argues that the cost-
plus pricing technique is not working well for EZ Sharp and presents a new pricing
plan based on optimal pricing techniques (i.e., the
MR
MC
rule).
To implement the
MR
MC
methodology, Andrews undertakes a statistical study
to estimate the demands for two Keen Edge™ products. The estimated demands are
where
Q
C
and
Q
P
are the monthly quantities demanded of Classic and Professional
models, respectively, and
P
C
and
P
P
are the prices of the Classic and Professional mod-
els, respectively. Andrews Consulting solved the demand equations simultaneously
to get the following inverse demand functions, which is why Anderson gets paid the
“big bucks”:
c.
Find the two marginal revenue functions for the Classic and Professional model
sharpeners.
d.
Set each marginal revenue function in part
c
equal to the appropriate cost and solve
for the profit-maximizing quantities.
e.
Using the results from part
d
, what prices will Andrews Consulting recommend for
each of the models?
f.
When the owner–manager sees the prices recommended by Andrews Consulting,
he brags about how close his simple cost-plus pricing method had come to their
suggested prices. Compute the profit EZ Sharp can earn using the consultants’
prices in part
d.
Is there any reason for the owner–manager to brag about his cost-
plus pricing skills?
8. Although there is relatively little difference in the cost of producing hardcover and pa-
perback books, these books sell for very different prices. Explain this pricing behavior.
9.
The Wall Street Journal
once reported on dating services, noting that the fees were $300
for men and $250 for women. The owner of the service said that the difference in fees
was to compensate for inequalities in pay scales for men and women. Can you suggest
any alternative reasons for this difference?

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