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

Question

Quizplus · Accepted Answer

Firm B's revenue in a strong economy is $1,200,000. Total costs are $240,000 (fixed) + $900,000 (variable: 1,200,000 widgets * $0.75). Profit before tax is $60,000 ($1,200,000 - $1,140,000). After 40% tax, the profit is $36,000.

Two Firms, a and B, Both Produce Widgets