Final answer:
To find Doggies Paradise Inc.'s profit maximizing quantity, we compare total revenue and total cost for each production level, with profit maximization occurring at the output level where marginal cost equals marginal revenue, and marginal cost is increasing.
Step-by-step explanation:
To calculate total revenue, marginal revenue, total cost, and marginal cost for a perfectly competitive firm such as Doggies Paradise Inc., we can create a table that calculates each of these metrics for various output levels from one to five units. To determine the profit maximizing quantity, one must compare total revenue and total cost and look for the quantity where total revenue exceeds total cost by the greatest margin, while keeping an eye on the marginal revenue and marginal cost to ensure that producing an additional unit doesn't decrease the profit.
It is essential to understand that the company needs to cover its fixed costs before it can start making a profit. Initial fixed costs are $100, independent of the number of units produced. The variable cost changes with the number of units, and by adding the variable cost to fixed costs, you obtain the total cost for a certain number of units. This information is used to plot total revenue and total cost curves. When the total revenue curve is higher than the total cost curve, the firm is making a profit.
Marginal revenue is the additional revenue from selling one more unit, while marginal cost is the additional cost of producing one more unit. Profit maximization occurs at the output level where marginal cost equals marginal revenue, assuming marginal cost is rising and marginal revenue is constant or falling. Marginal analysis is crucial in determining the optimal level of production.