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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 (Dollars) Quantity (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

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

If there were only one supplier of diamonds, the price would be $_____per diamond and the quantity sold would be _____ diamonds.

Suppose Russia and South Africa form a cartel.

In this case, the price would be $_____per 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 $_____.

If South Africa increased its production by 1,000 diamonds while Russia stuck to the cartel agreement, South Africa’s profit would _____ (increase/decrease) to $_____.

Why are cartel agreements often not successful?

(i) All parties would make more money if everyone increased production.

(ii) Different firms experience different costs.

(iii) One party has an incentive to cheat to make more profit.


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