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 $2,000 per diamond, and the demand for diamonds is described by the following schedule:

Price Quantity (Dollars) Quantity(Diamonds)

8000 2000

7000 3000

6000 4000

5000 5000

4000 6000

3000 7000

2000 8000

1000 9000

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 ____ to ______. Why are cartel agreements often not successful?

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

Different firms experience different costs.

All parties would make more money if everyone increased production.

Answer 1

Answer to blank 1: 2000

Answer to blank 2: 8000

Explanation:

When there are many suppliers of diamonds, price would equal marginal cost ($2,000), so the quantity would be 8,000 and price would be $2,000

Answer to blank 3: 6000

Answer to blank 4: 4000

Explanation:

Price ($)	Quantity	TR ($)	MR ($)
8000	2000	16000000
7000	3000	21000000	5000
6000	4000	24000000	3000
5000	5000	25000000	1000
4000	6000	24000000	-1000
3000	7000	21000000	-3000
2000	8000	16000000	-5000
1000	9000	9000000	-7000

If there were only one supplier of diamonds, it means the seller is a monopolist. The profit maximization condition in monopoly is MR = MC. Since in the above table MR not equal to MC at any point, the monopolist will produce where MR > MC. So, Supplier would sold 4000 units and charges $6000 per unit.

Answer to blank 5: 6000

Answer to blank 6: 4000

Answer to blank 7: 2000

Answer to blank 8: $8,000,000

Explanation:

If Russia and South Africa formed a cartel, they would set price and quantity like a monopolist, thus the price would be $6,000 and the quantity would be 4,000. If they split the market evenly, they would share total revenue of $24,000,000 (i.e. $6,000 * 4000) and total costs of $8,000,000 (i.e. $2,000 * 4000). Thus, the total profit is $16,000,000 (i.e. $24,000,000 - $8,000,000). So each would produce 2,000 diamonds and get a profit of $8,000,000 (i.e. $16,000,000).

Answer to blank 9: increase

Answer to blank 10: $9,000,000

Explanation:

If Russia produced 2,000 diamonds and South Africa produced 3,000, the price would decline to $5,000. South Africa’s revenue would rise to $15,000,000 (i.e. $5,000 * 3000) and costs would be $6,000,000 (i.e. $2,000 * 3000). Thus, South Africa’s profits is $9,000,000 (i.e. $15,000,000 - $6,000,000). Thus, profit of South Africa increases by $1,000,000 (i.e. $9,000,000 - $8,000,000)

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