Consider the market for A and B . The demand curve in market A is P A = 64 − Q A and in market B it is P B = 56 − Q B . The firm in market A is a regulated monopolist. It has the choice of two technologies. The cost function for technology 1 is C 1 = 720 + 16 Q A + 0 . 5 ( Q B ) 2 . The marginal cost of B for this technology is MC B 1 = Q B . The cost function for technology 2 is C 2 = 120 + 20 Q A + 14 ( Q B ) 2 . The marginal cost of B for this technology is MC B = 28 Q B . 2 Competitive supply in market B is perfectly elastic at P B = 28. What are the efficient prices for each technology? Which technology should be used? Suppose that the regulator only regulates the price of A . It does so by setting P A = AC A where AC A is average fully distributed costs. The regulator has decided that the appropriate division of common fixed costs is to allocate them equally between markets A and B . Suppose the regulated firm can choose its technology. What technology does the regulated firm choose? Why? Is its choice efficient?
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