Final answer:
The question requires financial calculations and graphing to determine the profit-maximizing output level for Doggies Paradise Inc. Total revenue, marginal revenue, total cost, and marginal cost must be calculated and graphed to find where marginal cost equals marginal revenue, indicating the profit-maximizing quantity.
Step-by-step explanation:
The subject of this question involves calculating various financial metrics for a perfectly competitive firm, Doggies Paradise Inc., which in turn will help to determine the profit-maximizing quantity of output. The question requires a step-by-step calculation of total revenue, marginal revenue, total cost, and marginal cost for different levels of output (one to five units), alongside the construction of graphs to illustrate the relationships between these metrics. Identifying the profit-maximizing output is central to the business's operational decisions and can be deduced by analyzing the point where marginal cost equals marginal revenue.
Here is a breakdown of the calculations:
- Total Revenue (TR) = Price * Quantity
- Marginal Revenue (MR) = Change in TR / Change in Quantity
- Total Cost (TC) = Fixed Costs + Variable Costs
- Marginal Cost (MC) = Change in TC / Change in Quantity
By plotting these values on a graph, we can visualize the total revenue and total cost curves, and the point where they intersect indicates the break-even point. The other diagram to sketch is the marginal revenue and marginal cost curves, and the quantity at which these two curves intersect corresponds to the profit-maximizing output level for the firm. This is because in perfect competition, the price (equal to MR) is given, and firms maximize profit where MR equals MC.