For firms to maximize total profit, what production rule must they follow?

To maximize total profit, firms must abide by the rule where marginal revenue equals marginal cost (MR = MC). This principle is foundational in microeconomics and applies to firms in both competitive and monopolistic markets.

When a firm is producing goods or services, it evaluates the additional revenue generated from selling one more unit of output against the additional cost incurred in producing that unit. If the revenue from selling the additional unit (marginal revenue) exceeds the cost of producing it (marginal cost), the firm can increase its profit by producing more. Conversely, if the cost exceeds the revenue, producing that additional unit would reduce profit. Therefore, firms continue adjusting their production until they reach a point where the two are equal, which is where they maximize total profit.

Understanding this relationship is crucial for firms to operate efficiently and strategically in the market. It allows businesses to optimize their production levels to not only maximize profits but also allocate resources effectively.