Firm B produces gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300 000 and variable costs of $1.40 per gadget. The corporate tax rate is 30%. If the economy is strong, the firm will sell 2 000 000 gadgets. If the economy enters a recession it will sell only half as many gadgets. If the economy is strong, the after-tax profit of Firm B will be ________.

Question

Quizplus · Accepted Answer

First, let's calculate the total cost (TC) of producing 2,000,000 gadgets:

Variable costs = 2,000,000 x $1.40 = $2,800,000
Fixed costs = $300,000

Total cost = $2,800,000 + $300,000 = $3,100,000

Next, let's calculate the revenue (R) from selling 2,000,000 gadgets:

Revenue = 2,000,000 x $2 = $4,000,000

Now we can calculate the pre-tax profit:

Pre-tax profit = R - TC = $4,000,000 - $3,100,000 = $900,000

To calculate the after-tax profit, we need to apply the corporate tax rate of 30%:

After-tax profit = Pre-tax profit x (1 - tax rate) = $900,000 x (1 - 0.30) = $630,000

Therefore, if the economy is strong and the firm sells 2,000,000 gadgets, the after-tax profit of Firm B will be $630,000 (option D).

Firm B Produces Gadgets