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 enters a recession, the after-tax profit of Firm A will be
A) $0.
B) $6,000.
C) $30,000.
D) $60,000.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

Firm A's revenue in a recession is $1,100,000. Total costs are $500,000 (fixed) + $550,000 (variable: 1,100,000 widgets * $0.50) = $1,050,000. Profit before tax is $1,100,000 - $1,050,000 = $50,000. After 40% tax, profit is $50,000 * (1 - 0.40) = $30,000.

Two Firms, a and B, Both Produce Widgets