If diamonds have a linear relationship with essentially no fixed costs, which co

Question

If diamonds have a linear relationship with essentially no fixed costs, which costs more: a single 1-carat diamond or two -carat diamonds? Are these the same? Choose the correct answer below 0 A. Because there are no fixed costs, the prices cannot be determined from the information given. B O c. lf linear, the 1-carat diamond would cost more than the two 0 D. If linear, these would cost the same amount in the absence of fixed costs f linear, the two -carat diamonds would cost more than the 1-carat dia mond because o te absence o fixed costs cara t diamonds because of the absence of fixed costs .

Explanation / Answer

As there is a linear relationship with the carats. Let the cost of diamond be computed as:

Cost = K*Carat

For some constant K.

Therefore cost of 1 single 1 carat diamond would be given as: = 1*K*1 = K

Cost of two (1/2) carat diamonds would be computed as: = 2*K*(1/2) = K

Therefore the costs are coming out to be the same here. ( in absence of fixed costs)

Therefore D is the correct answer here.

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