Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to “Calculate,” you must show how you arrived at your final answer.
Assume natural diamonds are sold in a competitive market. The equilibrium price is $6,000 per carat, and the equilibrium quantity is 8,000 carats.
(a) Using the numerical values above, draw a correctly labeled graph of the market for natural diamonds and show each of the following.
(i) The equilibrium price
(ii) The equilibrium quantity
(b) At a price of $7,500 per carat, will there be a surplus or a shortage in the market? Explain.
(c) Assume new diamond deposits are discovered. On your graph from part (a), show how this change will affect the equilibrium price and quantity in the market for natural diamonds.
(d) Assume instead that the price of lab-grown diamonds decreases. How will this change affect the market for natural diamonds? Explain.
(e) If both changes in part (c) and part (d) occurred simultaneously, what will happen to the equilibrium price and quantity of natural diamonds?
Ready when you areDraw demand sloping down and supply sloping up.
Draw demand (downward).
Draw a correctly labeled graph of the market for natural diamonds. Show the equilibrium price and quantity.