Firm A produces gadgets.The price of gadgets is $2 each.Firm A has total fixed costs of $1,000,000 and variable costs of $1.00 per gadget.The corporate tax rate is 40%.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 enters a recession,the after-tax profit of Firm A will be _________.

Question

Quizplus · Accepted Answer

In a recession, Firm A sells 1,000,000 gadgets. Revenue = 1,000,000 gadgets * $2 = $2,000,000. Variable costs = 1,000,000 gadgets * $1 = $1,000,000. Total costs = $1,000,000 (variable) + $1,000,000 (fixed) = $2,000,000. Profit before tax = $2,000,000 (revenue) - $2,000,000 (total costs) = $0. After-tax profit = $0 - 40% tax = $0.

Firm a Produces Gadgets