Final answer:
The general rule for profit maximization in a firm is to set marginal revenue to marginal cost. In a perfectly competitive market, the price is equal to marginal revenue. So, to maximize profits, the firm should produce at the quantity of output where marginal revenue is equal to marginal cost (MR = MC).
Step-by-step explanation:
The general rule for profit maximization in a firm is to set marginal revenue to marginal cost. In a perfectly competitive market, the price is equal to marginal revenue. So, to maximize profits, the firm should produce at the quantity of output where marginal revenue is equal to marginal cost (MR = MC).
At this point, the firm is earning the maximum possible profit because marginal revenue represents the additional revenue gained from producing one more unit of output, while marginal cost represents the additional cost of producing one more unit. If a firm produces where MR is greater than MC, it can increase profits by producing more. If MR is less than MC, it can increase profits by producing less.
This profit-maximizing rule is based on the assumption that the market price for the firm's output remains constant. If the market price changes, the profit-maximizing quantity of output may also change.