Final answer:
To determine the profit-maximizing quantity, calculate the total revenue, marginal revenue, total cost, and marginal cost for each unit level. Plot the revenue and cost curves to find where revenue is greatest above the cost, which is the profit-maximizing quantity for a perfectly competitive firm like Doggies Paradise Inc.
Step-by-step explanation:
The question revolves around determining the profit-maximizing quantity for a perfectly competitive firm named Doggies Paradise Inc. The firm sells dog winter coats at a price of $72 each, with fixed costs of $100, and varying total variable costs depending on the quantity produced. To calculate the optimal quantity, one must first calculate the total revenue, marginal revenue, total cost, and marginal cost for each output level from one to five units. Total revenue is found by multiplying the number of units sold by the price per unit, marginal revenue in a perfectly competitive market equals the price of the product, total cost is the sum of fixed costs and variable costs, and marginal cost is the increase in total cost when one additional unit is produced. The intersection where marginal revenue equals marginal cost dictates the profit-maximizing level of output.
After performing these calculations, plotting the total revenue and total cost curves will help visualize profit maximization. Wherever the total revenue curve is highest above the total cost curve, profit is at its maximum. Practically, the firm should keep producing units until the marginal cost of producing an additional unit exceeds the marginal revenue earned from that unit, which would be the profit-maximizing quantity.