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 diamo

Explain why Shining Stone faces a downward-sloping demand curve.

        Shining stone faces a downward sloping demand curve because shining stone has a market power and it can increase the price of diamond without losing all of its customers. Shining stone is a price maker, not a price taker.

Explain why the marginal revenue from an additional diamond sale is less than the price of the diamond.

        From the diamond sale which is additional, marginal revenue is actually less than diamond’s rate as for the diamond units which are previous, the revenue is less. Moreover, diamond’s price has to be decreased by the shining store to almost the same quantity or amount for all the units of diamond. This is why an additional sale of the diamond will decrease the marginal revenue.

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?

        At a price $200 the quantity demanded diamonds is 3 units, in the addition, the MC (Marginal Cost)and MR (Marginal Revenue) are equal atthis specific point showing a maximum profit of Shining Store. Though by reducing the price of diamond to $100 the quantitydemanded diamonds will increase 4 units. The MR curve at $100 goes into the horizontal axes’ negative region thatis incurring losses to Shining Store. Usually, no firm produces an output when MR is negative. Hence, Shining Store will not produce the diamonds when MR becomes negative.

    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.

    Profit maximization takes place at the point where MR is equal to MC. Given in the above diagram the marginal cost is $100, and MR of Shining Store is exactly equaled to its MC. Since Shining Store is a monopoly firm so the firm is price maker, not a price taker. Hence, the price Shining Stone will charge is $200 and the quantity maximizes Shining Stone profit is 3 units.

Conclusion of Managerial Economics

        In a nutshell, the shining store is a monopolist firm that is price taker the firm will produce 4 units of diamond and charge $200. The demand curve of a shining store is downward sloping because shining stone has a market power.

References of Managerial Economics

Dwivedi, D. N. 2002. Microeconomics: Theory And Applications. Pearson Education India.

Economics Online. 2018. Perfect competition. http://www.economicsonline.co.uk/Business_economics/Perfect_competition.html.

Klein, Andreas. 2007. Comparison of the models of perfect competition and monopoly under special consideration of innovation. GRIN Verlag.

Koury, Ken. 2012. Monopoly Strategy. Lulu.com.

Mankiw, N. Gregory. 2011. Principles of Economics. Cengage Learning.

The Economic Times. 2018. Definition of 'Perfect Competition'. https://economictimes.indiatimes.com/definition/perfect-competition.

.