Question Details

Explain why De Beers faces a downward-sloping demand curve.



1. 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- willingness to pay is $400; Jackie-,
$300; Joan-, $200; Mia-, $100; and Sophia-, $0. De Beers- marginal cost per diamond
is $100. This leads to the demand schedule for diamonds shown in the accompanying
table.


Price of                                                    Quantity of diamonds
diamond                                                         demanded
$500                                                                   0
400                                                                     1
300                                                                     2
200                                                                    3
100                                                                    4
0                                                                        5
a. Calculate De Beers- 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 lowers the price to
$100, how large is the price effect? 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- profit and which price De Beers will charge.




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