Well, I wouldn't consider myself a "guru" by any stretch of the imagination
, but I'm fairly certain your #2 scenario would give the best results out of the 3 you listed. Using the lowest possible minimum bitrate that will play properly on your dvd player would allow more kbps for higher-action scenes that actually need it, giving you an overall better picture. This way, you're not wasting precious bitrate on scenes that don't need it.
Overall though, I think the best thing you could do for better quality (depending on the length of the movie and if it's widescreen or fullscreen) is probably to use a higher resolution than 352x240 (if your dvd player supports higher resolutions), even if it means a drop in CQ level. I've done encodes with 704x480 (CQ in high 50s) and 544x480 (CQ as low as ~54) resolutions, and they still gave quite
acceptable (if not "
good") quality. Quality is subjective though so your opinion of "general minimum acceptable CQ levels at certain resolutions" may differ from mine. You'd be surprised...with some sources, you can get away with dropping CQ pretty darn low and it will still look pretty good/acceptable...much better than using a lower resolution with a higher CQ.
Good luck,
-d&c