Question 1. In order to maximize profits or minimize losses, a competitive firm will produce at the point where MC = MR. Do you agree or disagree with this statement? Explain your answer and use at least 2 examples in your response.
Question 2. Consider two firms X and Y produce identically tasting cold drinks. In order to increase the demand for its cold drink, firm X increases its advertisement outlay. However the advertising doesn’t increase its demand in the long run. Explain why this must be the case.
Question 3. The majority of the world’s diamonds comes from Country A and Country B. Suppose that the marginal cost of mining a diamond is $1,000 per diamond and that the demand schedule for diamonds is as follows:
Price Quantity
$6,000 5,500
5,000 6,500
4,000 7,500
3,000 8,500
2,000 9,500
1,000 10,500
A. If there were MANY sellers of diamonds, what would equilibrium price and quantity? Why?
B. If there were only one seller, what would be the equilibrium price and quantity? Why?
C. If Country A and Country B formed a cartel, What would be the equilibrium price and quantity? Why? Is this cartel likely to survive? Why or why not?