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)	(Diamonds)
8,000	2,000
7,000	3,000
6,000	4,000
5,000	5,000
4,000	6,000
3,000	7,000
2,000	8,000
1,000	9,000

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

diamonds.

If there were only one supplier of diamonds, the price would beper diamond and the quantity sold would be

diamonds.

Suppose Russia and South Africa form a cartel.

In this case, the price would beper diamond and the total quantity sold would bediamonds. If the countries split the market evenly, South Africa would producediamonds 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?

Different firms experience different costs.

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

All parties would make more money if everyone increased production.

Answer 1

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 many suppliers of diamonds, the price would be 2000 per diamond and the quantity sold would be 8000 diamonds.

If there were only one supplier of diamonds, the price would be 6000 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 6000 per diamond and the total quantity sold would be 4000 diamonds. If the countries split the market evenly, South Africa would produce 2000 diamonds and earn a profit of (6000-2000)*2000 = 8000000

.If South Africa increased its production by 1,000 diamonds while Russia stuck to the cartel agreement, South Africa's profit would increase by 1000000 to (5000-2000)*3000 = 9000000

Why are cartel agreements often not successful?

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