



Output 
Total Cost 
Price 
Total Revenue 
Which Output 
Marginal Revenue 
Marginal Cost 























































Because marginal revenue is the change in total revenue when another unit is produced and sold, to compute column 6 we simply compute how much the total revenue column changes when output changes. When output increases from 2 to 3 in the table above, total revenue increases from 34 to 48, or by 14. This 14 is the marginal revenue of the third unit of output. Similarly, because marginal cost is the change in total cost from adding another unit of output, to obtain column 7 we ask by how much the total cost column changes when output changes. When output increases from 2 to 3 in the table above, total cost increases by 12, from 31 to 43. This 12 is the marginal cost of the third unit of output.
Producing the first unit of output in the table above is worthwhile because it adds 18 to revenues and 10 to costs. Paying 10 to get 18 is a good deal, and the firm should do it. For the same reason, the second and third units are worth producing. To produce the fourth unit, the firm must pay 13 to get 12. This is not a good deal, so the level of output that maximizes profits is 3. (If it were possible to pick fractional units, it would be worthwhile to go just a bit beyond 3, to the point where marginal revenue exactly equals marginal cost.)
Notice that there is a cost in column 2 when the firm produces zero output. This is a fixed cost, a cost that exists when nothing is produced. For a realworld firm, fixed cost would include rental payments, insurance payments, and depreciation. If fixed costs are high enough, there may be no level of output for which a profit exists. In this case, the solution that the maximization principle gives minimizes losses. If losses get big enough and become permanent, the firm may find that the best way to minimize losses is to shut down completely and cease to exist as a firm.
The condition that the firm must set marginal revenue to marginal cost can be expressed in another way. Marginal cost is equal to the change in cost divided by the change in output. Because the equimarginal principle must hold if the firm is on (not above) its total cost curve, the change in cost can come from a change in any of the resources.^{1} Thus, marginal cost is equal to marginal resource cost divided by marginal product, a change in cost divided by a change in output. Hence, the condition for maximizing profits is
In this equation, we can see the role of all three constraints that the firm faces.
There is another way to apply the maximization principle to the firm. Instead of asking how much output it should produce, we can ask how much input should it hire, but this is treated in another group of readings.