# Question: The Smokey Mountain Coal Company sells coal to electric utilities

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 = TC/Q = \$5 + \$0.0002Q
Where Q 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 P = 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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