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's 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

a. Calculate De Beers's total revenue and its marginal revenue. From your calculation, draw the demand curve and the marginal revenue curve.
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. Draw the marginal cost curve into your diagram and determine which quantity maximizes De Beers's profit and which price De Beers will charge.

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