Task: The Appalachian Coal Company sells coal to electric utilities in the southeast. Unfortunately, Appalachian's coal has 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. Appalachian's total cost and marginal cost functions are:
TC = $250,000 + $5Q + $0.0002Qsquare
MC = Delta TC/Delta Q = $5 + $0.0004Q
where Q is tons of coal produced per month and TC includes a normal rate of return on investments.
Question 1: Calculate Appalachian's profit at the profit-maximizing activity level if prices in the industry are stable at $25 per ton and therefore P = MR = $25.
Question 2: Calculate Appalachian's optimal price, output, and profit levels if a new state regulation results in a $300,000 fixed cost increase that cannot be passed onto customers.