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DM 01

MANAGERIAL ECONOMICS

ASSIGNMENT

Assignment Code: AIMA2018DM01Last Date of Submission: 20st December 2018

Maximum Marks: 100

Attempt all the questions.

SECTION-A (15 marks for each question)

1. Explain various characteristics of perfectly competitive market. How is price and output
determined under these market conditions?

2. Why is demand curve, a downward sloping curve?

3. What is elasticity of demand? What are the various methods to calculate elasticity of demand?

4. With the help of suitable diagram, explain the relationship between average cost, average
variable cost and fixed cost.

5. Define isoquants. With the help of isoquants, explain the law of returns to scale.

Section-B (25 Marks)

Case Study

De Beers Abandons Its Diamond Monopoly

In 1887, Cecil Rhodes created the De Beers Consolidated Mines Company, which controlled about 90%
of the total world supply of rough uncut diamonds with its South African mines. Until 2001, De Beers
produced about half of the world’s diamonds in its mines in South Africa, Botswana, and Namibia, and it
marketed about 80% of the world’s diamond through its London-based Central Selling Organization
(CSO). Producers in Russia, Australia, Bostwana, Angola, and other diamond-producing nations sold
most of their production to De Beers, which then regulated the supply of cut and polished diamonds to
final consumers on the world market so as to keep prices high. When there was a recession in the
world’s major markets and demand for diamonds was low, De Beers withheld diamonds from the
market (i.e. stockpiled them) in order to avoid price declines until demand and price rose. In short, De
Beers acted as a monopolist and earned huge profits for itself and other producers by manipulating the
world supply of diamonds. De Beers also advertised diamonds to drum up demand with the famous
slogan “diamonds are forever” from the 1971 James Bond movie by the same name. In 2000, sales of
uncut rough diamonds through De Beers amounted to $5.7 billion, and worldwide retail sales of
diamond jewellery by De Beers and other firms exceeded $50 billion.
De Beers has had a monopoly in the marketing of diamonds since 1887 through wars, financial crisis,
racial strife, hostile governments, and attempts by independent producers to circumvent the monopoly.
When the former Soviet Union and Zaire started to sell large quantities of industrial diamonds on the
world market outside the CSO in the early 1980s, De Beers immediately flooded the market from its
own stockpiles (in excess of $5 billion in 2001), thereby driving prices sharply down and thus convincing
the new comers to join the cartel. And when large quantities of diamonds smuggled from Angola
flooded Antwerp in 1992, De Beers purchased up to $400 to $500 million worth of these diamonds to
prevent a collapse in prices. But faced with increased production by Russia (which sold only half of its
diamonds through CSO) and new suppliers from Australia and Canada, and embarrassed by disclosures
that to prop up prices it had bought “blood or conflict diamonds” from rebels in Angola, De Beers
abandoned its cartel arrangement in 2001 and began concentrating instead on an advertising-driven
strategy through its marketing arm, the Diamond Trading Company (DTC), to increase sales of its
diamonds as branded luxuries. In 2001 De Beers also reorganized itself into a private company. It
remains to be seen if this drastic change in strategy will work for De Beers.

6. Case Questions:

i. How do you characterize monopolist market? What forces limit the monopolist’s
market power in the real world?

ii. How De Beers has had a monopoly in the marketing of diamonds?