Because costs fell the firm finds that it can now earn greater profits than before. As shown above, profits increased from the green shaded area to the blue striped area.

  

11. Again considering the effect of an increase in the productivity of diamond miners. Which of the following best describes the resulting profit experience of the diamond industry.

1. an increase in profits from diamond sales because variable costs fell.
2. an increase in profits from diamond sales because the demand for diamond shifted out. Presumably when people buy diamonds they have no knowledge of or particular interest in the productivity of workers in the industry, so there is no reason to imagine that demand changed at all.
3. an increase in profits from diamond sales because fixed costs fell. Unless otherwise informed it is most reasonable to consider labor a variable cost since firms do tend to lay off workers when they cut production and hire more when they increase production, so a change in productivity must be a variable cost.
4. a reduction in profits from diamond sales because variable costs rose. An increase in productivity means more output per input, which is equivalent to a cost reduction, not increase.
5. a reduction in profits from diamond sales because the demand for diamond shifted back. Presumably when people buy diamonds they have no knowledge of or particular interest in the productivity of workers in the industry, so there is no reason to imagine that demand changed at all.

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