Question
Suppose that De Beers is a single-price monopolist in the diamond market. De Beers has five potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each
Suppose that De Beers is a single-price monopolist in the diamond market. De Beers has five potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will buy at most one diamondand only if the price is just equal to, or lower than, her willingness to pay. Raquels willingness to pay is $400; Jackies, $300; Joans, $200; Mias, $100; and Sophias, $0. De Beers marginal cost per diamond is $100. This leads to the demand schedule for diamonds shown in the accompanying table.
Price of diamond ($) | Quantity of diamonds demanded |
500 | 0 |
400 | 1 |
300 | 2 |
200 | 3 |
100 | 4 |
0 | 5 |
You may use the following table for your reference.
Price of diamond ($) | Quantity of diamonds demanded | TR ($) | MR ($) |
500 | 0 | 0 | - |
400 | 1 | 400 | 400 |
300 | 2 | ? | 200 |
200 | 3 | ? | ? |
100 | 4 | ? | ? |
0 | 5 | ? | ? |
(a) What is De Beers' total revenue when the price is $300?
- Answer: $ _______
(b) What is De Beers' marginal revenue when it sells the fourth diamond?
- Answer: $ ____
(c) Suppose De Beers currently charges $200 for its diamonds. If it lowers the price to $100, how large is the quantity effect? How large is the price effect?
- The quantity effect is $ ______ and the price effect is $ ________
(d) What is the quantity of diamonds that maximizes De Beers' profit? What price will it charge?
- De Beers will sell _________ diamonds at a price of $ _________ each.
Recall that the marginal cost of producing diamonds is constant at $100. Assume further that there is no fixed cost.
(e) If De Beers charges the monopoly price, how large is the total consumer surplus that the buyers experience (i.e., sum the individual consumer surplus that each buyer experiences.) and how large is the producer surplus?
- The total consumer surplus is $ __________ and producer surplus is $ ______
Suppose that upstart Russian and Asian producers enter the market and it becomes perfectly competitive.
(f) What is the perfectly competitive price? What quantity will be sold in this perfectly competitive market?
- At the perfectly competitive price of $__________________, __________ diamonds will be sold.
(g) At the competitive price, the total consumer surplus is $ ______ and producer surplus is $ ___________.
(h) Compare your answers to part (g) and part (e). How large is the deadweight loss associated with monopoly in this case?
- Answer: $ ______
De Beers is a monopolist, but it can now price-discriminate perfectly among all five of its potential customers. Recall that De Beerss marginal cost is constant at $100 and there is no fixed cost.
(i) If De Beers can price-discriminate perfectly, the total consumer surplus is $ __________ and producer surplus is $ _________.
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