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A Simple Model of the Firm 37

also shows the graph of cost versus output. As the graph shows, in this simple

example the firm’s total cost of production increases with output at a steady

rate; that is, the slope of the cost function is constant.

PROFIT From the preceding analysis of revenue and cost, we now have

enough information to compute profit for any given output of microchips the

firm might choose to produce and sell. These profit calculations are listed in

Figure 2.5, where the profit column is computed as the difference between the

revenue and cost columns reproduced from earlier figures. The graph in Fig-

ure 2.5 shows profit (on the vertical axis) as it varies with quantity (on the hor-

izontal axis). Observe that the graph depicts the level of profit over a wide

range of output choices, not just for the round-lot choices listed in the tabular

portion of the figure. In effect, the graph allows us to determine visually the

profit-maximizing, or optimal, output level from among all possible sales plans.

In this case, the optimal output appears to be about 3.3 lots (or 330 microchips)

per week.

FIGURE 2.5

Profit from Microchips

Profit is the difference

between the firm’s

total revenue and total

cost. The table and

graph show the

amount of profit the

firm will earn for dif-

ferent quantities of

microchips that it pro-

duces and sells.

Quantity Profit Revenue Cost

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

0.0  100 0 100

1.0 12 150 138

2.0 84 260 176

3.0 116 330 214

4.0 108 360 252

5.0 60 350 290

6.0  28 300 328

7.0  156 210 366

150

100

50

0

–50

–100

–150

0 12345678

Total Profit (Thousands of Dollars)

Total profit

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