Question

Davy's doggie daycare rents a warehouse and field for $2,000 a month to house its boarding pooches. farmer fred owns the property, he used to use it for farming and made $3,000 a month, but has since retired. what is the cost of the warehouse and field to davy?

Answer 1

The profit maximizing quantity for Doggies Paradise Inc. is three units, where the marginal revenue of $72 equals the marginal cost of $30. Producing beyond this quantity would result in the marginal cost exceeding the marginal revenue, leading to a decrease in profit.

Step-by-step explanation:

To answer the student's question, we calculate the total revenue (TR), marginal revenue (MR), total cost (TC), and marginal cost (MC) at each output level for Doggies Paradise Inc., which operates in a perfectly competitive market selling dog coats at $72 each. The company's fixed costs are $100.

1. For one unit, TR = $72, TC = $100 (fixed) + $64 (variable) = $164, so MR and MC cannot be calculated for the first unit.
2. For two units, TR = $144, TC = $100 (fixed) + $84 (variable) = $184, MR = TR change / Quantity change = $72, MC = TC change / Quantity change = ($184 - $164) / (2 - 1) = $20.
3. For three units, TR = $216, TC = $100 (fixed) + $114 (variable) = $214, MR = $72, MC = ($214 - $184) / (3 - 2) = $30.
4. For four units, TR = $288, TC = $100 (fixed) + $184 (variable) = $284, MR = $72, MC = ($284 - $214) / (4 - 3) = $70.
5. For five units, TR = $360, TC = $100 (fixed) + $270 (variable) = $370, MR = $72, MC = ($370 - $284) / (5 - 4) = $86.

The profit maximizing quantity is where MR equals MC. Since MR remains constant at $72 for each additional unit and MC is increasing with each additional unit, the profit maximizing quantity is reached just before the marginal cost exceeds the marginal revenue. This occurs at the third unit, where MR ($72) equals MC ($30); thus, producing the fourth unit would mean MC ($70) exceeds MR ($72), which would not be profitable.

When comparing total revenue and total cost to determine profits, we see that producing three units yields a profit (TR $216 - TC $214 = $2), while producing four units essentially breaks even (TR $288 - TC $284 = $4), and producing five units results in a loss (TR $360 - TC $370 = -$10). Therefore, the profit maximizing quantity for Doggies Paradise Inc. is three units.

Answer 2

Because Davy's warehouse is an explicit cost, the cost of the warehouse and field o Davy is $2,000. An explicit cost is a direct cost to someone during the time he ran the business. Each month Davy would rent the warehouse and field for $2,000 so that someone could run a business making it an explicit cost.