Two Firms, a and B, Both Produce Widgets

question 73

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¢ 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. Calculate firm B's degree of operating leverage.

• A) .714
• B) 9.09
• C) 7.86
• D) 7.14

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Definitions:

Internalize Externalities

The process of adjusting market prices to account for the external costs or benefits generated by a product or service's production or consumption.

Negative Externalities

Costs imposed on a third party not involved in a transaction, such as pollution from a factory affecting nearby residents.

Technology Spillover

Occurs when technological advances or innovations benefit other sectors or industries, beyond the original intention.

Negative Externality

A cost that affects a party who did not choose to incur that cost, often associated with environmental, health, and social issues.