Use the demand schedule for diamonds given in Problem 6. The marginal cost of producing diamonds is constant at $100. There is no fixed cost.
a. If De Beers charges the monopoly price, how large is the individual consumer surplus that each buyer experiences? Calculate total consumer surplus by summing the individual consumer surpluses. How large is producer surplus? Suppose that upstart Russian and Asian producers enter the market and the market becomes perfectly competitive.
b. What is the perfectly competitive price? What quantity will be sold in this perfectly competitive market?
c. At the competitive price and quantity, how large is the consumer surplus that each buyer experiences? How large is total consumer surplus? How large is producer surplus?
d. Compare your answer to part c to your answer to part a. How large is the deadweight loss associated with monopoly in this case?