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

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.