Two Firms,A and B,both Produce Widgets

question 86

Multiple Choice

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.Calculate firm A's degree of operating leverage.

• A) 11.0
• B) 2.86
• C) 9.09
• D) 1.00
• E) none of these.

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