1. Problems and Applications Q1 A large share of the world supply of diamonds co
ID: 1151214 • Letter: 1
Question
1. Problems and Applications Q1 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 $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$ 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 to $ Why are cartel agreements often not successful? Different firms experience different costs All parties would make more money if everyone increased production One party has an incentive to cheat to make more profit.Explanation / Answer
ANSWER:
1) If there were many suppliers of diamonds then the price would equal marginal cost which is $1000 and therefore the quantity will be 9,000.
2)
with only 1 supplier of diamond , quantity would be set where marginal costs equals marginal revenue and therefore the monopolist will maximize its profit at a price of $7000 and quantity of 3000.
3) if russia and south africa were to form a cartel then they would set the price and quantity like a monopolist so the price would be $7000 and quantity would be 3000. if they split the market evenly they would share total revenue of $21 million and costs of $3 million for a total profit of $18 million and therefore each would produce 1500 diamonds and get a profit of $9 million.
4) if russia produced 1500 diamonds and south africa produced 2500 diamonds then the price would decline to $6000, south africa revenue will be $15 million , costs would be $2.5 million , so profits would be $12.5 million which means an increase of $3.5 million.
5) option c is right as often one oparty cheats another as there are more profits to be made.
option b is wrong because profits would decline.
option a is wrong firms would experience same costs.
price in thousands of dollars quantity in thousands total revenue in millions of dollars marginal revenue 8 2 16 - 7 3 21 5 6 4 24 3 5 5 25 1 4 6 24 -1 3 7 21 -3 2 8 16 -5 1 9 9 -7Related Questions
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