Final answer:
To maximize profits, a firm should produce up to the point where marginal revenue (MR) equals marginal cost (MC). The profit is maximized at this point because producing more would incur costs higher than the revenue, thereby reducing profits. In perfect competition, the rule is to produce where the price equals MC.
Step-by-step explanation:
When discussing profit maximization for a firm, we refer to the crucial balance between marginal revenue (MR) and marginal cost (MC). If marginal costs exceed marginal revenue, the firm will reduce its profits for every additional unit of output produced.
To maximize profits, a firm should aim to produce up to the point where MR equals MC. Beyond this point, profit decreases. This is highlighted by the fact that profits are the same at an output (Q) of 70 and 80 units, but it's the move beyond 80 units where profits begin to fall, indicating that producing at Q=80, the point where MR=MC, is the ideal strategy.
It is also noteworthy that in a perfectly competitive market, the profit-maximizing rule can be simplified to producing at the output level where the price (P) equals MC. The relationship between market price and the firm's average total cost will determine whether the firm makes an economic profit or incurs losses.