Question

4.

(a) Do you expect the supply curve of diamonds is steep or quite flat? Explain.

(b) With better technology of finding diamonds, how will the price elasticity of supply of diamonds change? Show your answers in a graph.

Answer 1

a) supply curve of diamonds will be steeper , bcoz as demand for diamonds is highly price in-sensitive, so dQ/dP is Lower  

While dP/dQ will be higher , which is Slope of supply Curve

Thus steeper will be supply Curve

Also diamonds have high cost of production, & also Marginal cost of additional diamonds are quite higher.thus high, steep supply Curve

B) with better technology, Elasticity will increase

Bcoz availability of diamonds rise, so price sensitivity of Q

Also MC of Production of diamond will fall.

So supply Curve will get less strep, so supply Elasticity will rise