You and your roommates are starting a pet grooming service to help put yourselves through college. There are two other well-established pet services in your area.

One roommate believes the most important objective in setting prices for the new pet grooming business is to generate a large profit while keeping an eye on your competitors' prices; the other roommate believes it is important to maximize sales and set prices according to what your customers expect to pay.

Assume you have decided to buy an advertisement in the local newspaper to publicize your new pet grooming service. The cost of the ad is $1,000. You have decided to charge $40 for each dog, and your variable costs are $20 for each dog.

Question 1: Should you set your price higher or lower than that of the competition? Justify your answer.

Question 2: Referring to your roommates' beliefs in setting prices, who is right and why?

Question 3: How many dogs do you have to groom to break even on the cost of the ad? Show your calculations.