Modifying a product to increase its “value added” benefits customers and can also enhance supplier profits. For example, suppose an improved version of a product increases customer value added by $25 per unit. (In effect, the demand curve undergoes a parallel upward shift of $25.)
a. If the redesign is expected to increase the item’s marginal cost by $30, should the company undertake it?
b. Suppose instead that the redesign increases marginal cost by $15. Should the firm undertake it and (if so) how should it vary its original output and price?