Question

Decision Making by Individuals and Firms End of Chapter Problem 10. Assume De Beers is the sole producer of diamonds. When it wants to sell more diamonds, it must lower its price in order to induce shoppers to buy more. Furthermore, each additional diamond that is produced costs more than the previous one due to the difficulty of mining for diamonds. De Beers's total benefit schedule is given in the accompanying table, along with its total cost schedule. Quantity of diamonds Total benefit Total cost 1,100 1,900 2,700 3,400 4,000 4,500 4,900 5,200 100 200 400 800 1,500 3,800 a. What is the optimal quantity of diamonds to produce? Optimal output diamonds b. Calculate the total profit to De Beers from producing each quantity of diamonds. Which quantity gives De Beers the highest total profit? Profit-maximizing output: diamonds

Answer 1

Q Total Benefit Marginal benefit Total cost Marginal cost Profit 1 1100 21900 3 2700 4 3400 54000 614500 50 50 1050 1100 800 800 700 600 500 200 100 2500 400 200 3000 800 400 700 3200 1500 3000

7 4900 400 2500 1000 2400 85200 300 3800 1300 1400