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
A) $0.
B) $6,000.
C) $36,000.
D) $60,000.

Question

Quizplus · Accepted Answer

In a strong economy, Firm A sells 1,200,000 widgets at $1 each, generating $1,200,000 in revenue. Variable costs are $0.50 per widget, totaling $600,000 for 1,200,000 widgets. Fixed costs are $500,000. Before-tax profit is revenue minus total costs ($1,200,000 - $600,000 - $500,000 = $100,000). After-tax profit is $100,000 minus 40% corporate tax ($100,000 * 0.6 = $60,000).

Two Firms, a and B, Both Produce Widgets