Suppose that De Beers is a single-price monopolist in the market for diamonds. D

Question

Suppose that De Beers is a single-price monopolist in the market for diamonds. De Beers has five potential customers: Raquel, Jackie, Joan, Mia, and Sophia.

Each of these customers will buy at most one diamond—and only if the price is just equal to, or lower than, her willingness to pay. Raquel’s willingness to pay is $400; Jackie’s, $300; Joan’s, $200; Mia’s, $100; and Sophia’s, $0.

De Beers’ marginal cost per diamond is $100. The demand schedule for diamonds is shown in the accompanying table.

Price of Diamond ||| Qty. of Diamonds Demanded
$500................ ||| 0
$400................ ||| 1
$300................ ||| 2
$200................ ||| 3
$100................ ||| 4
$0................... ||| 5
a. Calculate De Beers’ total revenue and its marginal revenue.

Price of diamond|Qty of diam. demanded|Total Rev.|Marginal Rev.
$500...............| 0 ......................|............| --
400................| 1
300................| 2
200................| 3
100................| 4
0...................| 5


From your calculation, draw the demand curve and the marginal revenue curve. Please see letter "e".....marginal cost curve needs to be added to the graph of this.






b. Explain why De Beers faces a downward-sloping demand curve.



c. Explain why the marginal revenue from an additional diamond sale is less than the price of the diamond.



d. Suppose De Beers currently charges $200 for its diamonds.
If it lowered the price to $100, how large is the price effect?


How large is the quantity effect?


e. Add the marginal cost curve to your diagram from part a.

… and determine which quantity maximizes De Beers’s profit and which price De Beers will charge.

Explanation / Answer

Suppose that De Beers is a single-price monopolist in the market for diamonds. De Beers has five potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will buy at most one diamond—and only if the price is just equal to, or lower than, her willingness to pay. Raquel’s willingness to pay is $400; Jackie’s, $300; Joan’s, $200; Mia’s, $100; and Sophia’s, $0. De Beers’ marginal cost per diamond is $100. The demand schedule for diamonds is shown in the accompanying table. Price of Diamond ||| Qty. of Diamonds Demanded $500................ ||| 0 $400................ ||| 1 $300................ ||| 2 $200................ ||| 3 $100................ ||| 4 $0................... ||| 5 a. Calculate De Beers’ total revenue and its marginal revenue. Price of diamond|Qty of diam. demanded|Total Rev.|Marginal Rev. $500...............| 0 0 0 400................| 1 400 400 300................| 2 700 300 200................| 3 900 200 100................| 4 1000 100 0...................| 5 1000 0 From your calculation, draw the demand curve and the marginal revenue curve. Please see letter "e".....marginal cost curve needs to be added to the graph of this. Im not going to draw this, but it should look pretty much like this link: http://www.economicshelp.org/images/micro/monopoly.jpg b. Explain why De Beers faces a downward-sloping demand curve. Demand curve is slope downward because of inverse relationship between price and quantity. The demand curve slopes downwards due to the following reasons (1) Substitution effect: When the price of a commodity falls, it becomes relatively cheaper than other substitute commodities. This induces the consumer to substitute the commodity whose price has fallen for other commodities, which have now become relatively expensive. As a result of this substitution effect, the quantity demanded of the commodity, whose price has fallen, rises. (2) Income effect: When the price of a commodity falls, the consumer can buy more quantity of the commodity with his given income, as a result of a fall in the price of the commodity, consumer's real income or purchasing power increases. This increase induces the consumer to buy more of that commodity. This is called income effect. (3) Number of consumers: When price of a commodity is relatively high, only few consumers can afford to buy it, And when its price falls, more numbers of consumers would start buying it because some of those who previously could not afford to buy may now afford to buy it, Thus, when the price of a commodity falls, the number of its consumers increases and this also tends to raise the market demand for the commodity. (4) various uses of a commodity (5) law of diminishing marginal utility c. Explain why the marginal revenue from an additional diamond sale is less than the price of the diamond. This is because there are no more buyers for prices at or above $100 d. not sure about the last 2 Q's

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.