A large share of the world supply of diamonds comes trom Russia and South Atrica
ID: 1124835 • Letter: A
Question
A large share of the world supply of diamonds comes trom Russia and South Atrica. 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 7,000 6,000 5,000 4,000 3,000 2,000 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 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 price would be $ per diamond and the quantity sold would be diamonds Suppose Russia and South Africa form a cartel In this case, the price would be$ evenly, South Africa would produce per diamond and the total quantity sold would be diamonds. If the countries split the market diamonds and earn a profit of$Explanation / Answer
If there were many sellers, the price and quantity would be where MC=MR and Profit=0, so price = $2000 and quantity = 8000
If there were only one suppliers of diamonds, the price and quantity would be at maximum profit, so here price = 6000 and quantity = 4000
In this case price would be 4000 and quantity = 6000. If they split market South Africa would produce 2000 and earn a profit of 2000000 = (TR-TC = 2000*3000-2000*2000)
If South Africa increased its production by 1000 diamonds while Russia stuck to cartel, SA's Profit increase and to 3000000 = (TR-TC = 3000*3000-3000*2000)
Cartel agreements often not successful because of option 2 as agreements can be easily exploited by the other. But if both countries try to increase production then both might lose their share.
Price Quantity TR MC TC Profit MR 8000 2000 16000000 2000 4000000 12000000 7000 3000 21000000 2000 6000000 15000000 5000 6000 4000 24000000 2000 8000000 16000000 3000 5000 5000 25000000 2000 10000000 15000000 1000 4000 6000 24000000 2000 12000000 12000000 -1000 3000 7000 21000000 2000 14000000 7000000 -3000 2000 8000 16000000 2000 16000000 0 -5000 1000 9000 9000000 2000 18000000 -9000000 -7000Related Questions
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