Final answer:
In a perfectly competitive market, a firm cannot endlessly increase profits by selling more because it encounters diminishing returns and increased production costs, and the profit maximization point is where marginal cost equals marginal revenue.
Step-by-step explanation:
Because a firm in a perfectly competitive market is very small relative to the market and because it is selling exactly the same product as every other firm, it can sell as much as it wants without having to lower its price. However, a firm cannot simply increase its profits by selling an extremely high quantity because of the concept of diminishing returns. As output increases, the costs of production will also increase, often at a faster rate due to factors such as overtime pay for workers, maintenance of equipment, and potentially higher prices for additional inputs that become scarcer as demand increases. Furthermore, since all products in a perfectly competitive market are identical, a firm cannot differentiate its product to sell more at a higher price. Therefore, the profit maximization point is reached when marginal cost equals marginal revenue, at which point producing more would not increase profits, but rather could lead to losses.