Final answer:
The theoretical activity level is the absolute maximum production a firm could achieve using all resources to the fullest extent, which is not practically sustainable. Firms typically aim for the practical activity level, considering real-life constraints and maximizing profits by balancing production, marginal revenue, and marginal costs.
Step-by-step explanation:
The absolute maximum production activity of a manufacturing firm is called the theoretical activity level. This represents the highest level of activity that the company could achieve if it utilized all of its resources to their fullest extent, which includes all machinery operating at their maximum capacity and all employees working the maximum hours possible without any downtime. However, it's worth noting that this level is often not sustainable in the long-term due to factors like machine wear and tear, employee fatigue, and the need for maintenance and downtime. In contrast, the practical activity level refers to a more achievable and sustainable level of production that takes into account these real-world constraints. Firms typically operate at the practical level, using trial and observation to find the right balance between changes in production and the resulting changes in marginal revenue and marginal cost.