Question

In a perfectly competitive market structure, a firm's total fixed costs are $260, average variable costs are $4, and marginal revenue is $6. What is the firm's total cost at the level of output where marginal cost equals marginal revenue?

1) $260
2) $266
3) $270
4) $274

Answer 1

The profit-maximizing output level for Doggies Paradise Inc. is where marginal cost equals marginal revenue, which is equal to the price in a perfectly competitive market. A table and graph comparing these values at different output levels can help identify this quantity.

Step-by-step explanation:

In a perfectly competitive market, the firm Doggies Paradise Inc. determines its profit-maximizing quantity by equating marginal cost (MC) to marginal revenue (MR), which is the same as the price (P) in such a market structure. To calculate the total revenue, marginal revenue, total cost, and marginal cost, we need to create a table with varying quantities (from one to five units) and corresponding values.

Table Example:

• Quantity: Number of units produced and sold
• Total Revenue (TR): Price per unit multiplied by quantity
• Marginal Revenue (MR): Change in total revenue from selling one more unit. It's constant and equal to the price in a perfectly competitive market.
• Total Cost (TC): Fixed costs plus total variable costs
• Marginal Cost (MC): Change in total cost from producing one more unit

To find the profit maximizing quantity, we look for the output level where MR equals MC, which is typically found by graphing these curves. The profit-maximizing quantity is the output before MC exceeds MR.