9781118041581

A Simple Model of the Firm 35

peaks, and eventually begins to fall, finally falling to zero at Q 8.5 lots. (Note

that to sell 8.5 lots, the requisite sales price from Equation 2.2 is zero; that is, the

lots would have to be given away.) In short, the law of demand means that there

is a fundamental trade-off between P and Q in generating revenue. An increase

in Q requires a cut in P, the former effect raising revenue but the latter lower-

ing it. Operating at either extreme—selling a small quantity at high prices or a

large quantity at very low prices—will raise little revenue.

The revenue results in Figure 2.3 can be obtained more directly using basic

algebra. We know that and that the market-clearing price satisfies

from Equation 2.2. Substituting the latter equation into the

former yields the revenue function

[2.3]

Figure 2.3 also shows the graph of revenue as it depends on the quantity

of chips sold. At the sales quantity of 2 lots, the market-clearing price is

$130,000; therefore, revenue is $260,000. The graph clearly indicates that the

firm’s revenue rises, peaks, then falls as the sales quantity increases. (Some

RP#Q(17020Q)Q170Q20Q^2.

P 170 20Q

RP # Q

0 246810

100

200

300

400

Quantity (Lots)

Total Revenue (Thousands of Dollars)

FIGURE 2.3

Revenue from

Microchips

The table and graph

show the amount of

total revenue the firm

will earn for different

quantities of microchips

that it sells.

Quantity Price Revenue

(Lots) ($000s) ($000s)

0.0 170 0

1.0 150 150

2.0 130 260

3.0 110 330

4.0 90 360

5.0 70 350

6.0 50 300

7.0 30 210

8.0 10 80

8.5 0 0

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