Question

# A large share of the world supply of diamonds comes from Russia and South Africa. Suppose...

A large share of the world supply of diamonds comes from Russia and South Africa. Suppose that the marginal cost of mining diamonds is constant at \$1,000 per diamond, and the demand for diamonds is described by the following schedule:

Price (Dollars)Quantity (Diamonds)
8,0005,000
7,0006,000
6,0007,000
5,0003,000
4,0009,000
3,00010,000
2,00011,000
1,00012,000

If there were many suppliers of diamonds, the price would be _______  per diamond and the quantity sold would be _______ diamonds.

If there were only one supplier of diamonds, the grice would be _______  per diamond and the quantity sold would be _______ diamonds.

Suppose Fusia and South Africa form a cartel.

In this case, the price would be _______ per diamond and the total quantity sold would be _______ diamonds. If the countries split the market evenly, South Africa would produce _______ diamonds and earn a profit of _______ .

If South Africa increased its production by 1, 000 diamonds while Russia stuck to the cartel agreement, South Africa's profit would _______  and to _______

Wily are cartel agreements often not successful?

• All parties would make more money if everyone increased production.

• Different firms experience different costs.

• One party has an incentive to cheat to make some profit.

Explanation:

If there are many suppliers of diamonds, it means the market is a competitive market. So, the firms will set price at the point where, MC = P. Since MC is \$1,000, therefore, the price would be \$1,000. At this price the quantity is 12,000.

Explanation:

If there is only one supplier of diamonds, it means the firm is a monopolist. It can produce the quantity where either MR is equal to or greater than MC. The monopolist will maximize profits at a price of \$7,000 and a quantity of 6,000.

Explanation:

If Russia and South Africa formed a cartel, they would set price and quantity like a monopolist, so the price would be \$7,000 and the quantity would be 6,000. If they split the market evenly, each would produce 3,000 diamonds.

South Africa's profit = (\$7,000 * 3,000) - (\$1,000 * 3,000) = \$18,000,000

Explanation:

If South Africa produced 4,000 and Russia produced 3,000 diamonds, the total quantity is 7,000 diamonds. So, the price would decline to \$6,000. Now,

South Africa's profit = (\$6,000 * 4,000) - (\$1,000 * 4,000) = \$20,000,000

Ans: One party has an incentive to cheat to make more profit.

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