1.Noticing that profits on college text books are very high, the Beast Book Store (BBS), with the help of a venture capitalist, has gone into text book publishing. In its current production range its average total cost is approximately equal to its marginal cost which it estimates to be about $25. It has estimated that price elasticity of demand for its books at current price levels to be about -1.5.

1.The manager of BBS uses mark-up pricing to price the books that it sells using a 150% mark-up (even with this mark-up BBS can still underprice most other book publishers). Assuming that BBS wants to maximize short-term profits on its book sales and initially enjoys a monopoly in the local college textbook production market, is this a good pricing procedure?

2.Harvard and other local colleges soon start publishing companies of their own increasing competition and causing the price elasticity of demand for BBS books to increase to -2.0. Assuming that BBS's demand curve that generates this -2.0 price elasticity estimate will not significantly change as BBS changes its prices, should the manager continue to use the same mark-up pricing procedure? How would you explain your view to the manager assuming that she has not taken managerial economics?

Given the -2.0 price elasticity estimate under the assumptions in b), what price would you recommend and how would you explain your price selection to the manager?