3. Lou Lou's Lavish Accessories makes lip gloss and sets a price for her lip gloss using a mark-up on fully allocated costs (i.e. average total costs). She faces a constant marginal cost of $3/unit. Total fixed costs for a year's production are estimated at $10,400. She chooses a mark-up of 20%, believing that such a figure is 'fair'. She manages to sell 100 units of lip gloss each week. Based on this information answer the following:

a. Calculate the price charged for lip gloss.

b.Given that the demand for the lip gloss can be written as: Q = 1000 - 150P. Draw a suitable diagram and calculate the profit-maximising price and quantity. What yearly profits are earned? How do they compare to profits in part a)?

c.What would your advice to Lou Lou's Lavish Accessories be, based on these answers?

d.What is the elasticity of demand at the optimal price?