Final answer:
To determine the profit-maximizing quantity for Doggies Paradise Inc., calculate total revenue, marginal revenue, total cost, and marginal cost for each output level. In a perfectly competitive market, the profit-maximizing quantity is where marginal revenue equals marginal cost.
Step-by-step explanation:
Profit Maximizing Quantity for Doggies Paradise Inc.
When determining the profit maximizing quantity for a firm like Doggies Paradise Inc., we need to consider the total revenue, total cost, marginal revenue, and marginal cost for producing different levels of output. To do this, let's start by calculating these values and tabulating them for each of the output levels, from one to five units.
The price per dog coat is $72, which is also the marginal revenue (MR) in a perfectly competitive market since it remains constant for each additional unit sold. We add the fixed costs of production, which are $100, to the variable costs for total costs (TC). The marginal cost (MC) for each additional unit can be derived from the difference in total variable costs at each level of output.
Using the given variable costs and the fixed cost, we can calculate the total cost and then derive the marginal cost for each level of output. Once we have MR and MC for each unit, we can identify the profit maximizing quantity as the level of output where MR equals MC.
Beyond this point, producing additional units would not increase profits, as the cost of producing an extra unit would exceed the revenue it generates. We can also plot the total revenue and total cost curves, as well as the marginal revenue and marginal cost curves, to visually identify the profit maximizing quantity.
It is not possible to plot diagrams here, but generally, the total revenue curve would slope upwards (as price is constant, total revenue is a linear function of quantity), and the total cost curve would start at the fixed cost level and curve upwards as variable costs are added. Where these two curves intersect represents the break-even point. The point where the marginal cost curve intersects the marginal revenue curve indicates the profit maximizing output level.