Problem three A large share of the world supply comes Suppose that the marginal

Question

Problem three A large share of the world supply comes Suppose that the marginal cost of mining diamonds in cohchedule. ant at $1000 per diamond and the demand for diamonds is d de marginal costo diamonds comes from Russia and South escribed by the following schedule. Price Quantity 8000 70006000 6000 5000 4000 300010000 2000 11000 1000 12000 5000 7000 8000 9000 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 1000 diamonds while Russia stuck to the cartel agreement? d) If your answers in part () to explain why cartel agr part (c) to explain why cartel agreements are often not successful

Explanation / Answer

Price Quantity MC TR MR 8000 5000 1000 40000000 7000 6000 1000 42000000 2000000 6000 7000 1000 42000000 0 5000 8000 1000 40000000 -2000000 4000 9000 1000 36000000 -4000000 3000 10000 1000 30000000 -6000000 2000 11000 1000 22000000 -8000000 1000 12000 1000 12000000 -10000000 a) If there are many sellers in the market then market will be perfectly competitive. Therefore, Each firm will produce where Price = MC. So, the equilibrium price wil be $1000 and supply will be 12000. b) In case of one firm. The firm will produce upto the point where MR is equal to MC or greater than MC. Therefore, equilibrium price will be 7000 and quntity will be 6000. c) If Russia and south Africa formed a cartel Then they both will produce 3000 each and charge 6000 each . Profit will be 5000*3000= $15000000. If South Africa increased production by 1000 its profit will increase by (4000*8000)-15000000 =$17000000. While Russia will lose its market share a South Africa has to bring down price to sell more. d) Because of deviation from co-operating cartels are not succesful.

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