A large share of the world supply of diamondscomes from Russia and South Africa. Suppose thatthe marginal cost of mining diamonds is constant at$1,000 per diamond and the demand for diamonds isdescribed by the following schedule:Price Quantity$8,000 5,000 diamonds7,000 6,0006,000 7,0005,000 8,0004,000 9,0003,000 10,0002,000 11,0001,000 12,000a. If there were many suppliers of diamonds, whatwould be the price and quantity?b. If there were only one supplier of diamonds, whatwould be the price and quantity?c. If Russia and South Africa formed a cartel, whatwould be the price and quantity? If the countriessplit the market evenly, what would be SouthAfrica’s production and profit? What wouldhappen to South Africa’s profit if it increased itsproduction by 1,000 while Russia stuck to thecartel agreement?d. Use your answers to part (c) to explain why cartelagreements are often not successful.
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 Quantity
$8,000 5,000 diamonds
7,000 6,000
6,000 7,000
5,000 8,000
4,000 9,000
3,000 10,000
2,000 11,000
1,000 12,000
a. If there were many suppliers of diamonds, what
would be the price and quantity?
b. If there were only one supplier of diamonds, what
would be the price and quantity?
c. If Russia and South Africa formed a cartel, what
would be the price and quantity? If the countries
split the market evenly, what would be South
Africa’s production and profit? What would
happen to South Africa’s profit if it increased its
production by 1,000 while Russia stuck to the
cartel agreement?
d. Use your answers to part (c) to explain why cartel
agreements are often not successful.
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