Pete, my first e-book is around 49,000 words, the second around 45,000 and the third around 47,000 (give or take).
The bottom line (for my experience, anyway), seems to be that people don't want to pay a higher price for my e-books (romance genre, your mileage may vary, especially in a different genre). The $1.99 price seems to have helped and the third e-book being offered at $2.99 has made no impact on sales at all, only my royalty. The $.99 cent price point was the best for the second e-book in terms of sales and I am trying to decide about reducing the price again.
My two cents would be to try offering the books separately and also offering them as a set and see where your sales are strongest. The nice thing about offering the first book free is that you will most likely see a large amount of downloads quickly. This gives you exposure that, quite frankly, is the best advertising around (speaking from my very limited experience). You can determine how long you want to keep the book free. Some folks only keep it free for a week, then put a price back on it. I believe my sales have continued to be fairly good because I have left the first book free. I'm still receiving around 1,000 downloads a day of the free e-book and today marks three weeks since it has been free on Amazon. EDITED TO ADD: Downloads in November have not equaled 1,000 a day for the free e-book. I just checked my stats and realized there have been 1772 downloads in the first week of November, which on average would be 197 downloads per day. Sorry about that, I did not intentionally misreport the number of downloads, I simply hadn't checked in several days and thought they were still around 1,000. My apologies.
Another thing to note is that when you purchase an e-book, you see the number of kb's not the number of pages. Many people seem to skim right over that information (hence the number of complaints you read about in the reviews when someone downloads a short story that they didn't realize was going to be so short they could read it in ten minutes).
I have two short stories (one is about 3,000 words, the other around 10,000 words) and I have noted the word count in the description so people know they are not getting a full novel. The stories are complete in themselves, not excerpts or anything, but if you read the Kindle boards, there are a lot of people who said they felt cheated because the e-books were too short.
$1.99 for a 34,000 word book seems reasonable to me. At that price point, though, you won't be able to receive seventy percent royalties. The price must be set at a minimum of $2.99. If you set the price point at $2.99 and then priced it at $1.99 using Smashwords, you could ask Amazon to price match. When (and if) they agree to price match, you would receive seventy percent royalties on the $1.99 amount, which would be about $1.40 in royalties. If you price it at $1.99 everywhere, you will receive the thirty-five percent royalty and receive $.70 cents on that book. Your readers would pay the same price ($1.99); however, you would receive twice as much in royalties by using the price match method.