Question

Calpo Company buys and sells a product that has a variable cost per unit of $18. Calpo's fixed costs amount to $48,000. The product sells for $22 each. As a result of competition Calpo has been forced to establish a target sales price of $21 per unit. If Calpo implements the pricing strategy, the break-even point will

Answer 1

To determine the profit-maximizing quantity for Doggies Paradise Inc., we calculate total revenue, total cost, marginal revenue, and marginal cost for each output level, and then identify where marginal revenue equals marginal cost.

Step-by-step explanation:

The student's question pertains to calculating various financial metrics for Doggies Paradise Inc., a perfectly competitive firm. First, we must compute the total revenue (TR), total cost (TC), marginal revenue (MR), and marginal cost (MC) for each output level from one to five units. Since the firm is in perfect competition, MR is equal to the price of $72 for each additional unit sold. To find the profit maximizing quantity, we look for where MR equals MC.

calculations of TR,TC,MR and MC:

For one unit, the TR is $72, TC (fixed cost plus variable cost) is $164, and MC (change in TC when one more unit is produced) is $64. Two units would have a TR of $144, TC of $184, and MC of $20. Similarly, for three, four, and five units, we compute these values accordingly. The profit-maximizing quantity is where the additional revenue from selling an extra unit (MR) is equal to the additional cost of producing that extra unit (MC).

REVENUE AND COST CURVES:

In the total revenue and total cost diagram, TR and TC curves are plotted to illustrate break-even and profit/loss areas. For the marginal curves, MR and MC are sketched, looking for their intersection that indicates the optimal output level for profit maximization.