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 $1,000 per diamond, and the demand for diamonds is described by the following schedule: 

Price (Dollars)	Quantity (Diamonds)
8,000	5,000
7,000	6,000
6,000	7,000
5,000	3,000
4,000	9,000
3,000	10,000
2,000	11,000
1,000	12,000

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.

Answer 1

Answer to blank 1: $1,000

Answer to blank 2: 12,000

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.

Answer to blank 3: $7,000

Answer to blank 4: 6,000

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.

Answer to blank 5: $7.000

Answer to blank 6: 6,000

Answer to blank 7: 3,000

Answer to blank 8: $18,000,000

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

Answer to blank 9: Iincreases

Answer to blank 10: $20,000,000

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.