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 cents per widget.Firm B has total fixed costs of $240,000 and variable costs of 75 cents 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 A will be

Question

Quizplus · Accepted Answer

First, let's calculate the total costs for each firm:

Total costs for Firm A = Total fixed costs + (Variable cost per widget x Number of widgets sold)
Total costs for Firm A = $500,000 + (0.50 x 1,100,000)
Total costs for Firm A = $1,050,000

Total costs for Firm B = Total fixed costs + (Variable cost per widget x Number of widgets sold)
Total costs for Firm B = $240,000 + (0.75 x 1,100,000)
Total costs for Firm B = $990,000

Next, let's calculate the revenue for each firm:

Revenue for each firm = Price per widget x Number of widgets sold
Revenue for each firm = $1 x 1,100,000
Revenue for each firm = $1,100,000

Now we can calculate the pre-tax profit for each firm:

Pre-tax profit for Firm A = Revenue - Total costs
Pre-tax profit for Firm A = $1,100,000 - $1,050,000
Pre-tax profit for Firm A = $50,000

Pre-tax profit for Firm B = Revenue - Total costs
Pre-tax profit for Firm B = $1,100,000 - $990,000
Pre-tax profit for Firm B = $110,000

Next, we need to apply the corporate tax rate of 40% to calculate the after-tax profit for each firm:

After-tax profit for Firm A = Pre-tax profit - (Corporate tax rate x Pre-tax profit)
After-tax profit for Firm A = $50,000 - (0.40 x $50,000)
After-tax profit for Firm A = $50,000 - $20,000
After-tax profit for Firm A = $30,000

After-tax profit for Firm B = Pre-tax profit - (Corporate tax rate x Pre-tax profit)
After-tax profit for Firm B = $110,000 - (0.40 x $110,000)
After-tax profit for Firm B = $110,000 - $44,000
After-tax profit for Firm B = $66,000

Therefore, the after-tax profit of Firm A in a recession would be $30,000, which is option C.

Two Firms,A and B,both Produce Widgets