Question

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 $3,000 per diamond, and the demand for diamonds is described by the following schedule:

Price	Quantity
(Dollars)	(Diamonds)
8,000	3,000
7,000	4,000
6,000	5,000
5,000	6,000
4,000	7,000
3,000	8,000
2,000	9,000
1,000	10,000

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 price would be __________ per diamond and the quantity sold would be ________ diamonds.

Suppose Russia 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 [decrease/increase] to $___________.

Why are cartel agreements often not successful?

A) All parties would make more money if everyone increased production.

B) One party has an incentive to cheat to make more profit.

C) Different firms experience different costs.

Answer 1

Price	Quantity	TR	MR
(Dollars)	(Diamonds)
8,000	3,000	24000000
7,000	4,000	28000000	4000
6,000	5,000	30000000	2000
5,000	6,000	30000000	0
4,000	7,000	28000000	-2000
3,000	8,000	24000000	-4000
2,000	9,000	18000000	-6000
1,000	10,000	10000000	-8000

If there were many suppliers of diamonds, the price would be P=MC = 3000 per diamond and the quantity sold would be 8000 diamonds.

If there were only one supplier of diamonds, the price would be MC=MR =7000 per diamond and the quantity sold would be 4000 diamonds.

Suppose Russia and South Africa form a cartel.

In this case, the price would be 7000 per diamond and the total quantity sold would be 4000 diamonds. If the countries split the market evenly, South Africa would produce 4000/2 =2000 diamonds and earn a profit of 2000*(7000-3000) = 8000000

If South Africa increased its production by 1,000 diamonds while Russia stuck to the cartel agreement, South Africa's profit would [increase] to 3000*(6000-3000) = 9000000

Why are cartel agreements often not successful?.

B) One party has an incentive to cheat to make more profit.