Question 8.5

2. Use Figure 8-6 to show what happens to the following when the marginal cost of diamond production rises from $200 to $400.

  1. Marginal cost curve

  2. Profit-maximizing price and quantity

  3. Profit of the monopolist

  4. Perfectly competitive industry profits

As the accompanying diagram shows, the marginal cost curve shifts upward to $400. The profit-maximizing price rises and quantity falls. Profit falls from $3,200 to $300 × 6 = $1,800. Competitive industry profits, though, are unchanged at zero.

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