The magority of the world\'s diamonds comes from Country A and Country B. Suppos
ID: 1252237 • Letter: T
Question
The magority of the world's diamonds comes from Country A and Country B. Suppose that the marginal cost of minning a diamond is 1,000 per diamond and that the demand schedule for diamonds is as follows:
Price Quantity
$6,000 5,500
$5,000 6,500
$4,000 7,500
$3,000 8,500
$2,000 6,500
$1,000 10,500
A. If there were MANY sellers of diamonds, what would be the equillibruim price and quantity? why?
B. If there were only ONE seller, what would be the equillibruim price and quantity? why?
C. If Country A and Country B formed a cartel, what would be the equilibruim price and quantity? why? is this cartel likely to survive? why or why not?
Explanation / Answer
A.) If there are many sellers, or essentially a perfectly competitive market, the sale price ofa diamond should be equal to the cost, or $1,000. So the equilibrium is at 10,500 units sold at $1000 each B.) If there were only one seller, they would seek to maximize profits. So they would only sell 5,500 units at $6,000 each. C.) They would sell at the same price and quantity as in part B, onyl difference is that they must split the profits/sales. There's too much incentive to undercut the other for profits, so this cartel is unlikely to last for an extended period of time.
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