A large share of the world supply of diamonds comes from Russia and South Africa. Suppose that the marginal cost is constant at $1000 per diamond, and the demand for diamonds is described by the following schedule:
Price Quantity
$8000 5000
$7000 6000
$6000 7000
$5000 8000
$4000 9000
$3000 10000
$2000 11000
$1000 12000
a. If there were many suppliers of diamonds, what would be the price and quantity?
b. If there was 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 while Russia stuck to its cartel agreement?
d. Use your answer to part (c) to explain why cartel agreements are often not successful.