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 is strong,the after-tax profit of Firm A will be ______.

Question

Quizplus · Accepted Answer

Firm A's total cost per widget = $0.50 (variable cost) + ($500,000/1,200,000 widgets) (fixed cost per unit) = $0.91 per widget

Firm A's revenue per widget = $1 per widget

Therefore, Firm A's profit per widget during a strong economy = $1 - $0.91 = $0.09

Number of widgets sold during a strong economy = 1,200,000

Firm A's total profit during a strong economy = $0.09 x 1,200,000 = $108,000

Corporate tax rate = 40%

After-tax profit of Firm A during a strong economy = $108,000 x (1 - 0.4) = $64,800

Therefore, the after-tax profit of Firm A during a strong economy will be $60,000 (closest option is D).

Two Firms,A and B,both Produce Widgets