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 B will be
A) $0.
B) $6,000.
C) $36,000.
D) $60,000.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

In a recession, Firm B sells 1,100,000 widgets. Revenue = 1,100,000 widgets * $1/widget = $1,100,000. Variable costs = 1,100,000 widgets * $0.75/widget = $825,000. Total costs = Fixed costs + Variable costs = $240,000 + $825,000 = $1,065,000. Profit before tax = Revenue - Total costs = $1,100,000 - $1,065,000 = $35,000. After-tax profit = Profit before tax * (1 - Tax rate) = $35,000 * (1 - 0.4) = $35,000 * 0.6 = $21,000. None of the provided options match this calculation.

Two Firms, a and B, Both Produce Widgets