Posted by mary on Sunday, November 28, 2010 at 11:40pm.
Is there anything that I should add to make sure all questions are answered correctly, 1-3. please review for accuracy and let me know if I should add anything. thanks you
Question:
The majority of the world’s diamonds comes from Country A and Country B. Suppose that the marginal cost of mining a diamond is $1,000 per diamond and that the demand schedule for diamonds is as follow s:
Price Quantity
6,000 5,500
5,000 6,500
4,000 7,500
3,000 8,500
2,000 9,500
1,000 10,500
1. If there were MANY sellers of diamonds, what would equilibrium price and quantity? Why.
In this scenario, you would end up with price of each diamond is equal to marginal cost because you have a total increase in cost that arises from an extra unit of production If there were many sellers of diamonds, the equilibrium price would be $1,000 per diamond because each additional diamond sold the profits goes up $1000. Quantity demanded would be $10,500 because that is the total amount of diamonds that each country produces.
2. If there were only one seller, what would be the equilibrium price and quantity? Why?
If you have only one seller a monopoly would take place in business. Seller in this case has total control over what price he can sell each diamond for. In other words, he can charge any price he wants. Furthermore seller will charge price equal to marginal revenue. In this case price would be 6,000 and quantity/demand would be 5,500 units.
3. If Country A and Country B formed a cartel, what would be the equilibrium price and quantity? Why? Is this cartel likely to survive? Why or why not?
In this case equilibrium price would be 6,000 and the quantity would be 5,500 units. When two players form a cartel, the cartel will have monopoly over the market. In turn, they will act as monopolists and charge any price they want. Country A has only one rive, Country B, so one might be tempted to charge lower price and grab the higher market share. Competition between the two countries in directly related to the outcome of each other. I don’t feel that the cartel is likely to survive because the rivalry between the two markets will be in conflict. The only way that the cartel can succeed is if they are honest with each other and stick to terms and conditions. In addition to this information you have to remember since there are only two players in the market, one may be tempted to charge lower price and grab higher market share.
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