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 $1,000 per diamond, and the demand for diamonds is described by the following schedule:
Price Quantity
$8,000 ...............5,000 diamonds
7,000 ................. 6,000
6,000 .................7,000
5,000 ..................8,000
4,000 ...............9,000
3,000 ................10,000
2,000 ................11,000
1,000 ................12,000
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 1,000 while Russia stuck to the cartel agreement?
d. Use your answers to part (c) to explain why cartel agreements are often not successful.