# Assignment 4

**Topics:**Economics, Profit maximization, Microeconomics

**Pages:**5 (1028 words)

**Published:**October 24, 2014

Problem 1.

a.(1 point) What is the total fixed cost for the DeBeers Diamonds? The total fixed cost for the DeBeers Diamonds is zero.

b. (2 points) Complete the table above, providing total revenue, marginal revenue and marginal cost, as well as Total Cost when Q = 0. (Remember to put marginal items in between units.)

COSTSREVENUES

Quantity

Produced Total Cost

($)Marginal

CostQuantity

DemandedPrice

($/unit)Total

RevenueMarginal

Revenue

00 014,0000

6,00013,000

16,000 113,00013,000

6,00011,000

2 12,000 212,00024,000

6,0009,000

318,000 311,00033,000

6,0007,000

4 24,000 410,00040,000

6,0005,000

530,000 59,00045,000

6,0003,000

636,000 68,00048,000

6,0001,000

7 42,000 77,00049,000

6,000-1,000

848,000 86,00048,000

6,000-3,000

954,00095,00045, 000

c. (1 point) Draw a graph, by hand or using software such as Excel, showing the demand, marginal revenue, and marginal cost curves. (Remember to put marginal items in between units.)

d. (1 point) Using the table, if the DeBeers Diamonds operates as a non-price discriminating monopolist, what will be the profit-maximizing level of output for the firm? What will be the price at the profit maximizing quantity? The profit maximizing output for the firm will be 4 units, the price at a this output level is $10,000/unit. e. (1 point) Assuming the DeBeers Diamonds can operate as in d) above, what will be the total profit at the profit-maximizing quantity? Briefly explain what would have to be true in order for profit to persist in the long-run for the DeBeers diamonds? Total profit= total revenue- total cost

Total profit= (4*10 000) – 24,000

Total profit= $16,000

The total profit at the profit-maximizing quantity will be $16, 000. In order for profit to persist in the long run it would have to be true that no new companies entire the market. f. (2 points) Assuming the DeBeers Diamonds is able to operate as a monopolist in this market and does not price discriminate, what is the value of consumer and producer surplus at the point of profit maximization? Use the table. Show your calculations. Consumer surplus= (13, 000- 10, 000) + (12, 000- 10, 000) + (11, 000- 10, 000)+

(10, 000 – 10, 000)

= 3, 000 + 2, 000 + 1, 000

= $6, 000

Therefore, the value of consumer surplus at the point of profit maximization is $6, 000.

Producer surplus= ($14, 000 – $10,000) x (4- 0)

= $4, 000 x 4

= $16, 000

Therefore, the value of producer surplus at the point of profit maximization is $16, 000.

g. (2 points) Using the table, assume instead that the DeBeers Diamonds is able to exercise perfect price discrimination. How much should the company produce? How much profit will the company then receive? The company should produce 8 units if they are able to exercise perfect price discrimination. Profit= (13, 000- 6, 000) + (24, 000- 12, 000) + (33, 000 – 18, 000) + (40, 000 – 24, 000) + (45, 000 – 30, 000) + (48, 000 – 36, 000) + (49, 000 – 42, 000) + (42,000 + 42,000) = 7,000 + 12, 000 + 15, 000 + 16, 000 + 15, 000 + 12, 000 + 7, 000 = 84, 000

Therefore, the company will then receive $84, 000 in profit.

h.(2 points) Assuming the DeBeers Diamonds is able to exercise perfect price discrimination, what is the value of consumer surplus and the producer surplus at the point of profit maximization? Explain. At the point of profit maximization, the value of consumer surplus is zero and the value of producer surplus is $28, 000. This is due to the fact that in perfect price discrimination the firm or the producer pays the difference. i. (2 points) If the DeBeers Diamonds perfectly price-discriminates, what would be the price they would charge for the second diamond ring and for the fourth diamond ring. How likely is it that...

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