Two firms, A and B, both produce widgets.The price of widgets is $1 each.Firm A has total fixed costs of $500,000 and variable costs of 50'per widget.Firm B has total fixed costs of $240,000 and variable costs of 75' per widget.The corporate tax rate is 40%.If the economy is strong, each firm will sell 1,200,000 widgets.If the economy enters a recession, each firm will sell 1,100,000 widgets. If the economy is strong, the after-tax profit of Firm A will be

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In a strong economy, Firm A sells 1,200,000 widgets at $1 each, so revenue is $1,200,000. Variable costs are $0.50 per widget, totaling $600,000 for 1,200,000 widgets. Fixed costs are $500,000. Pre-tax profit is revenue - variable costs - fixed costs = $1,200,000 - $600,000 - $500,000 = $100,000. After-tax profit is $100,000 - 40% of $100,000 = $100,000 - $40,000 = $60,000.

Two Firms, a and B, Both Produce Widgets