The smokey mountain coal company sells coal to electric


Incidence of Regulation Costs

The Smokey Mountain Coal Company sells coal to electric utilities in the southeast. Unfortunately, Smokey's coal has a high particulate content, and, therefore, the company is adversely affected by state and local regulations governing smoke and dust emissions at its customers' electricity-generating plants. Smokey's total and marginal cost relations are

TC = $1,000,000 + $5Q + $0.0001Q2:

MC = DTC/DQ  =  $5 + $0.0002Q

where is tons of coal produced per month and TC includes a risk-adjusted normal rate of return on investment.

A. Calculate Smokey's profit at the profit-maximizing activity level if prices in the industry are stable at $25 per ton and therefore MR = $25.

B. Calculate Smokey's optimal price, output, and profit levels if a new state regulation results in a $5-per-ton cost increase that can be fully passed on to customers.

C. Determine the effect on output and profit if Smokey must fully absorb the $5-per-ton cost increase.

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Accounting Basics: The smokey mountain coal company sells coal to electric
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