Final answer:
Businesses should continue operations if their revenues exceed variable costs and contribute to fixed costs. For profit maximization, a firm like Doggies Paradise Inc. should produce quantities where marginal revenue equals marginal cost.
Step-by-step explanation:
Understanding Revenue and Costs in Business Operations
When evaluating whether a business should continue operations, one key factor to consider is if the revenue generated covers the variable costs and contributes to fixed costs. In the example provided, a center earns revenues of $20,000, and variable costs are $15,000. Assuming the center has additional fixed costs, the gross contribution margin is $5,000, which can be potentially used to cover fixed expenses. Hence, the profit or loss would depend on the amount of fixed costs. If the center's fixed costs are less than $5,000, it would be profitable and should continue in business.
Profit Maximization
For a perfectly competitive firm like Doggies Paradise Inc., profit maximization is achieved where marginal revenue (MR) equals marginal cost (MC). To find the profit-maximizing quantity, one must calculate the total revenue and marginal revenue, as well as the total and marginal cost for each output level from one to five units. Then, compare MR and MC and choose the quantity where MR is just equal to or greater than MC before it exceeds it. This is the quantity at which profit is maximize