A large share of the world supply of diamonds comes from Russia and South Africa
ID: 1107021 • Letter: A
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:
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.
Explanation / Answer
1)
When there were many suppliers, the market for diamonds is perfectly competitive where price would equal to marginal cost $1000, so the quantity would be 12000 diamonds.
2)If there were only supplier of diamonds , which means it is a monopoly. In this case quantity will be where marginal cost equals marginal revenue.
Create table
from the above table, it can be seen that monoplist will maximize profits at quantity of 6,000 and price of 7,000.
3)
if south africa and russia make carterl, it means it will work like the monopoly, so the quantity will be 6,000 and price of 7,000 as shown above in monoploy case.
if south africa and russia split the market evenly, they would share total revenue of $42 million, costs of $6 million and profit of $36 million.So each will produce 3,000 units and get profit of $18 million each.
If russia produce 3,000 and south africa increase production to 4,000, the price will be lower to $6,000 . South africa revenues will increase to $24 million , cost would be $4 million , profits will be $20 million that is increase of $2 million f.
4)
Cartel are not successfull often as one party has high incentive to cheat and meke higher profit.In this case, each could increase profit by $2 million by producing an extra thousand diamonds. However, if both countries did this, profits would decline for both of them.
Price Quantity Total revenues Marginal revenue 8000 5000 40000000 7000 6000 42000000 2000 6000 7000 42000000 0 5000 8000 40000000 -2000 4000 9000 36000000 -4000 3000 10000 30000000 -6000 2000 11000 22000000 -8000 1000 12000 12000000 -10000Related Questions
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