Question

Suppose that De Beers is a single-price monopolist in the marketfor 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 ifthe 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 schedulefor 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 marginalrevenue.

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


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






b. Explain why De Beers faces a downward-sloping demandcurve.



c. Explain why the marginal revenue from an additional diamond saleis 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 priceeffect?


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 andwhich price De Beers will charge.