Question

A carving knife manufacturer produces both a generic brand and a high-end professional series. Home users value the generic brand knife at $40 and the professional series knife at $60. Professional chefs value the generic knife at $70 and the professional series knife at $130. The firm wants to sell both types of knives, and each user will only buy one knife. What prices should the firm set for the two knives to have users self-select themselves profitably?

Answer 1

The price is to be selected should be maximizing the profit for the knife manufacturer. This can be done by charging a price of $40 for the generic brand and 130 dollars for the professional one. This will provide a profit of 40 x 2 + 130 = 210

Because home users value the generic brand at 40, charging a price of 70 will result in purchase of only 1 generic brand knife and if the price is charged at 40, both home users and professional chefs will buy and so the profit will be 80.

Because the professional chefs value 130 for a professional series knife, and the home users value it at 60, charging a price of 60 will generate only 120 as revenues. Instead a price of 130 will generate greater revenue

Hence the generic brand should be sold at 40 dollars and the professional series should be sold at 130 dollars.