Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy enters a recession, the before-tax profit of firm C will be
A) $1,680,000.
B) $1,170,000.
C) $510,000.
D) $204,000.

Question

Quizplus · Accepted Answer

Firm C's before-tax profit in a recession is calculated as follows: Revenue = 1,400,000 hangers * $1.20 = $1,680,000. Total costs = $750,000 (fixed) + (1,400,000 * $0.30) = $1,170,000. Before-tax profit = $1,680,000 - $1,170,000 = $510,000.

Two Firms, C and D, Both Produce Coat Hangers