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¢ per widget. Firm B has total fixed costs of $240,000 and variable costs of 75¢ 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
A. $0.
B. $6,000.
C. $36,000.
D. -$60,000.
D. -$60,000.
$1,200,000 ? $500,000 FC ? 0.5(1,200,000) VC = $100,000 (1 ? 0.4) = $60,000.
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