Final answer:
The profit maximizing quantity for Doggies Paradise Inc. is determined where marginal revenue equals marginal cost. Total revenue, marginal revenue, total cost, and marginal cost are calculated for output levels one to five to find this intersection point.
Step-by-step explanation:
The profit maximizing quantity for a perfectly competitive firm like Doggies Paradise Inc. selling winter coats for dogs can be found when marginal revenue (MR) equals marginal cost (MC). Given that each dog coat sells for $72, the fixed costs are $100, and variable costs differ with the number of units produced, we calculate total revenue (TR), MR, total cost (TC), and MC for different output levels.
Total revenue is calculated as the selling price multiplied by the number of units sold. Marginal revenue in a perfectly competitive market is equal to the price of the product, which is $72. Marginal cost for each additional unit can be computed by finding the change in total variable cost for an additional unit produced. We add the variable cost to the fixed cost to find the total cost. The profit maximizing quantity is where MR equals MC. We determine this quantity by comparing MR and MC at each output level.
The following table illustrates the different calculations required to determine the profit maximizing quantity for Doggies Paradise Inc.:
- Calculate total revenue for each output level (1-5).
- Since MR is constant at $72 in a perfectly competitive market, determine marginal cost for each additional unit.
- Compare MR and MC to find the output level where MR equals MC.
The profit maximizing quantity is where the firm's marginal cost curve intersects the marginal revenue curve.