Question

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 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, the firm will sell only half as many gadgets. If the economy enters a recession, the after-tax profit of firm A will be _________.

Answer 1

$ 0

Step-by-step explanation:

number of gadgets produced in strong economy= 2,000,000

price each gadget= $2

number of gadgets produced in recession= 1,000,000

variable cost is $1 per gadget

fixed cost= $1,000,000

now profit before tax can be calculated as

= 1,000,000*(2-1)-1,000,000

=$0

now since the profit of company is zero the company does nit pay any tax