1. A large share of the world supply of diamonds comes fromRussia and South Africa. Suppose that the mar- ginal cost of miningdiamonds is constant at $1,000 per diamond and the demand fordiamonds 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 theprice and quantity?
b. If there were only one supplier of diamonds, what would bethe price and quantity?
c. If Russia and South Africa formed a cartel, what would bethe price and quantity? If the countries split the market evenly,what would be South Africa’s production and profit? What would hap-pen to South Africa’s profit if it increased its pro- duction by1,000 while Russia stuck to the cartel agreement?
d. Use your answers to part (c) to explain why cartelagreements are often not successful.
