solution

The demand for diamonds is given by

PZ = 980 – 2QZ where QZ is the number of diamonds demanded if the price is PZ per diamond.

The total cost (TCZ) of the De Beers Company (a monopolist) is

given by TCZ = 100 + 50QZ + 0.5Q 2

Z where QZ is the number of diamonds produced and put on the market by the

De Beers Company. Suppose the government could force De Beers to behave

as if it were a perfect competitor—that is, via regulation, force the fi rm to price

diamonds at marginal cost.

a. What is social welfare when De Beers acts as a single-price monopolist?

b. What is social welfare when De Beers acts as a perfect competitor?

c. How much does social welfare increase when De Beers moves from

monopoly to competition?