Final answer:
The profit-maximizing output for Doggies Paradise Inc. is discovered by equating marginal revenue with marginal cost, represented by where these curves intersect, and illustrated through total revenue and total cost curves. This concept will help determine the most profitable number of units to produce for a perfectly competitive firm.
Step-by-step explanation:
The question involves determining the profit maximizing quantity for a perfectly competitive firm, Doggies Paradise Inc., that sells winter coats for dogs. To do so, we need to calculate total revenue, marginal revenue, total cost, and marginal cost for each level of output from one to five units. We also need to sketch diagrams representing the total revenue and total cost curves, as well as the marginal revenue and marginal cost curves. The profit-maximizing quantity is the output level where marginal cost is equal to the marginal revenue. This is the point where the firm can no longer increase profit by producing an additional unit, as the cost of producing one more unit (marginal cost) would be higher than the revenue generated from selling it (marginal revenue).
Total Revenue and Total Cost Curves
The total revenue curve will trend upwards as output increases, since revenue is increasing with each additional unit sold at a constant price, due to the nature of a perfectly competitive market. The total cost curve initially slopes upward at a decreasing rate due to economies of scale and later at an increasing rate due to diseconomies of scale.
Marginal Revenue and Marginal Cost Curves
The marginal revenue curve in a perfectly competitive market is horizontal (constant) because the firm is a price taker, selling each unit at the market price. The marginal cost curve typically has an 'S' shape, initially decreasing due to the variable cost spread over more units, then increasing due to rising variable costs with higher output levels.