When producing 10 units, Jean has total variable costs of $400, total fixed costs of $550, and assets of $3000. Assume you can approximate MC with AVC.
a. If she wants a return of 10%, what price should she charge?
b. Suppose that instead of determining price based on his target return, Jean decides to use a standard markup pricing scheme. What is the optimal markup for Jean if she estimates that the price elasticity of demand for her product is -2?
c. If she uses the optimal markup obtained in part b, how much should he charge for her product?
d. Given your answers to parts a and c, which pricing mechanism should he chose? How would your answer change if the price elasticity for her product decreases considerably due to an decrease in the availability of substitutes.