Suppose that Shining Stone is a single-price monopolist in the market for diamonds. Shining Stone has five potential customers: Buyer A, Buyer B, Buyer C, Buyer D, and Buyer E. 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. Buyer A’s willingness to pay is $400; Buyer B’s, $300; Buyer C’s, $200; Buyers D’s, $100; and Buyer E’s, $0. Shining Stone’s marginal cost per diamond is $100. This leads to the demand schedule for diamonds shown in the accompanying table.
Price of Diamond (AED.) Quantity of Diamonds Demanded 500 0400 1300 2200 3100 40 5 a) Calculate Shining Stone’s total revenue and its marginal revenue. From your calculation, draw the demand curve and the marginal revenue curve.b) Explain why Shining Stone 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 Shining Stone 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 Shining Stone profit and which price Shining Stone will charge.
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