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"diamond/water" paradox

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1. Early Classical economists found the following "diamond/water" paradox perplexing: "Why is water, which is so useful and so necessary, so cheap, when diamonds, which are so relatively unnecessary, are so expensive?" In modern economic terms, explain the water/diamond paradox.

2. Assume labor costs are 17.5% of revenue per vehicle for General Motors. In union negotiations during the late 1990s, GM attempted to cut its workforce to increase productivity. Together with the job reductions they planned, GM officials hoped to make the company's North American operations fully competitive with its U.S. and Japanese rivals with respect to total costs. Why are productivity gains so important to GM?

3. Your average total cost is $40; the price you receive for a good is $12. Should you keep on producing the good? Why?

4. What portion of the marginal cost curve is the competitive firm's supply curve? How is a competitive firm's marginal cost curve related to the market supply curve?

5. Monopolists differ from perfect competitors because monopolists always make a profit? True or false? Why?

6. What are the "monopolistic" and the "competitive" elements of monopolistic competition?

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