INSTRUCTOR DISCUSSION NOTES:
The Diamond Industry is Now More Than the De Beers Industry

1. Why do you think that most cutting and polishing of rough diamonds are done in India and China?

Those activities are in all likelihood labor-intensive, and those two countries hold a comparative advantage in production of labor-intensive goods.

2. Explain what is happening to the market concentration of the diamond industry. Why is this happening?

The number of firms is increasing, and the market share of each individual firm is falling. This is happening because De Beers is allowing more competition into the market.

3. As more and more firms enter this market, engaging in exploration and sales of rough-cut diamonds, explain what will happen to the long-run profitability of these firms.

Long-run profits of these firms should fall, for several reasons. First, fixed costs are increasing significantly as a result of the exploration. Second, as more firms - and therefore, more substitutes - enter the market, economic profit begins to fall for each firm.

Multiple Choice/True False Questions

1. As De Beers begins to relinquish its hold on diamond sales, the market for diamonds becomes
  1. Less oligopolistic
  2. More monopolistically competitive
  3. Less monopolistically competitive
  4. A and B
ANS . d

2. As a result of the certification schemes, the price of "certified" diamonds should ----- and the price of "blood diamonds" should ------- .
  1. Rise; rise.
  2. Rise; fall.
  3. Fall; rise.
  4. Fall; fall.
ANS . b

3. What should happen to the demand for genuine diamonds as a result of the increase in advertising?
  1. Demand should become more elastic.
  2. Demand should become less elastic.
  3. Demand should remain constant.
  4. Demand should decrease.
ANS . b

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