Question: Consider the market for diamonds. Historically, DeBeers controlled the market as a monopoly. This market power, however, eroded over time and now market supply and demand dynamics are thought to control prices in this market. Suppose the market demand function for diamonds is given by:

where Q _D is the number of diamonds demanded if price is P per diamond.

The market supply function is given by:

where Qs is the number of diamonds produced if P is price per diamond.

1. Solve for market equilibrium price and market equilibrium quantity.
2. Circle the best solution below. Suppose a price control is imposed on diamonds. If the government sets a price control of P=$500, is this considered a price floor or price ceiling?
   1. PRICE FLOOR PRICE CEILING
3. →
4. Suppose the supply and demand diagram below represents the market demand and supply functions given in this question. On the diagram:

1. Plot the values of market equilibrium price and quantity from part a.
2. Plot the value of the price control from part b.
3. Plot the values of quantity demanded and quantity supplied under the price control from part b.
4. Shade or fill-in the area that represents consumer surplus under the price control from part b.
5. Shade or fill-in the area that represents producer surplus under the price control from part b. Make sure to clearly differentiate this area from consumer surplus.
   

   P ($)

   
   

   980

   S

   
   

   50

   D

   
   

   Q

1. Calculate (in $) the value of consumer surplus under the price control from part b.
2. Compare the price control in part b. to market equilibrium:
   1. Circle the best solution below (calculations are not required). Compared to market equilibrium, does producer surplus increase, decrease, or stay the same under the price control in part b.?
      INCREASE DECREASE STAY THE SAME
   2. Circle the best solution below (calculations are not required). Compared to market equilibrium, does consumer surplus increase, decrease, or stay the same under the price control in part b.?
      INCREASE DECREASE STAY THE SAME
   3. Circle the best solution below (calculations are not required). Compared to market equilibrium, does social welfare increase, decrease, or stay the same under the price control in part b.?

INCREASE DECREASE STAY THE SAME

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