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 Quantity of diamonds
diamond 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 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's profit and which price De Beers will charge.