Final answer:
Doggies Paradise Inc. identifies the profit-maximizing quantity by calculating and comparing total revenue, marginal revenue, total cost, and marginal cost for each output level. Marginal revenue and cost curves intersect at the profit-maximizing output. Production decisions in perfectly competitive markets are guided by these calculations.
Step-by-step explanation:
Understanding the Profit Maximizing Quantity for Doggies Paradise Inc.
Doggies Paradise Inc. operates in a perfectly competitive market and determines pricing and production strategies based on cost analysis. Here we analyze the profit-maximizing output level by preparing a table with total revenue (TR), marginal revenue (MR), total cost (TC), and marginal cost (MC).
Total Revenue is calculated by multiplying the price of one dog coat ($72) by the quantity sold. Since the firm is a price taker in a perfectly competitive market, Marginal Revenue remains equal to the price.
Total Cost sums the fixed cost of production ($100) with the total variable costs at each output level. Marginal Cost is the change in total variable cost when an additional unit is produced. We can derive it by subtracting the total variable cost at the previous output level from the total variable cost at the current level.
By analyzing these values, we identify the profit-maximizing quantity, which is the output level where MR = MC or where MR just starts to fall below MC. Graphically, the intersection of marginal revenue and marginal cost curves dictates this optimum output level. The total revenue and total cost curves enable visualization of profitability across different output levels.