solution

The market for digital cameras is relatively new. Ajax Inc. produces what it

regards as a high-quality digital camera. Knockoff Inc. produces what it regards

as a low-quality digital camera. However, because the market is so new, reputations

for quality have not yet developed, and consumers cannot tell the quality

difference between an Ajax digital and a Knockoff digital just by looking

at them. If consumers knew the difference, they’d be willing to pay $200 for a highquality

camera, and they’d be willing to pay $100 for a low-quality camera. It

costs Ajax $85 to produce a high-quality camera, and it costs Knockoff $55 to

produce a low-quality camera. A recent MBA hire at Ajax suggests that Ajax could differentiate its camera from Knockoff ’s by offering a full-coverage warranty (which would fully

cover any defect in the camera at no cost to the customer). The MBA estimates

that it would cost Ajax $20 per year to offer such a warranty. The MBA also

estimates that it would cost Knockoff $40 per year should Knockoff attempt

to copy Ajax’s warranty strategy. Consumers will feel that the camera with the

longest warranty is high-quality and that with the shortest warranty is lowquality.

The camera companies want to maximize the profit per camera.

What is Ajax’s profit per camera in the digital camera market?