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Homework answers / question archive / Suppose that the DeBeers company faces very little competition from other firms in the wholesale diamond market

Suppose that the DeBeers company faces very little competition from other firms in the wholesale diamond market

Marketing

Suppose that the DeBeers company faces very little competition from other firms in the wholesale diamond market. Why isn't the price of wholesale diamonds $10,000 per carat?

a. All are correct.

b. because the company would sell so few diamonds that it would earn higher profits by selling at a lower price

c. because stockholders would not allow such a high price

d. because the government would not allow such a high price

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The answer is b).

The DeBeers company is effectively a monopolist in the market, but this does not mean that it should charge as high a price as possible, if it wants to maximize profit. This is because the company faces a downward sloping demand curve, and thus would only be able to sell fewer units if it charges a higher price. In other words, the firm can sell more by charging a lower price, which could potentially lead to a higher profit.

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