Question

Cartel 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 $3,000 per diamond, and the demand for diamonds is described by the following schedule: Price Quantity (Dollars) (Diamonds) 8,000 3,000 7,000 4,000 6,000 5,000 5,000 6,000 4,000 7,000 3,000 8,000 2,000 9,000 1,000 10,000

1. If there were many suppliers of diamonds, the price would beper diamond and the quantity sold would bediamonds.
2. If there were only one supplier of diamonds, the price would beper diamond and the quantity sold would bediamonds. Suppose Russia and South Africa form a cartel.
3. In this case, the price would beper 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 $___???.
4. If South Africa increased its production by 1,000 diamonds while Russia stuck to the cartel agreement, South Africa's profit would DECREASE OR INCREASE to $____???.
5. Why are cartel agreements often not successful? CHOOSE ONE
One party has an incentive to cheat to make more profit.
Different firms experience different costs.
All parties would make more money if everyone increased production.

Answer 1

Well if you think about it in the long run the darkness shall take over in about 44 years from now

Answer 2

If there were many suppliers of diamonds, the price would be per diamond and the quantity sold would be 5,000 diamonds.

If there were only one supplier of diamonds, the price would be $8,000 per diamond and the quantity sold would be 3,000 diamonds.

In this case, the price would be $7,000 per diamond and the total quantity sold would be 4,000 diamonds. If the countries split the market evenly, South Africa would produce 2,000 diamonds and earn a profit of $8,000,000.

If South Africa increased its production by 1,000 diamonds while Russia stuck to the cartel agreement, South Africa's profit would DECREASE. (Option A)

Cartel agreements are often not successful because one party has an incentive to cheat to make more profit. (Option A)

How is that so?

Below are rationales for each solution:

1. Market Equilibrium: Imagine a bustling diamond market with numerous miners. Competition drives down prices to $5,000 per diamond, where miners earn just enough to cover their costs, selling 5,000 diamonds.

2. Monopoly Muscle: Enter a single, powerful diamond tycoon. This monopolist flexes their muscles, restricting supply to artificially inflate prices to a whopping $8,000 per diamond, but only sells 3,000 diamonds. Consumers pay the premium, while the tycoon swims in profits.

3. Cartel Cooperation: Now, Russia and South Africa join hands to form a diamond cartel. They agree on a price sweet spot of $7,000 per diamond, enticing buyers with a slight discount compared to the monopoly, while still raking in profits. Both nations split the market, with South Africa producing 2,000 diamonds for a cool $8 million profit.

4. Cheating Temptation: But South Africa gets greedy. They secretly increase production by 1,000 diamonds, hoping to grab a larger market share. This backfires! The sudden flood of diamonds dips the price, and South Africa's overall profit actually decreases. Cheating, it seems, can be a costly gamble.

5. Cartel Cracks: So why do cartels like this often crumble? The answer boils down to human nature. Each member has an incentive to cheat for a bigger slice of the pie. This constant temptation undermines the cartel's ability to control supply and maintain high prices, leading to its eventual downfall.