Economics

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3. 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 diamond is described by the following schedule.
Price/Quantity: 8000/5000, 7000/6000, 6000/7000, 5000/8000, 4000/9000, 3000/10000, 2000/11000, 1000/12000


(a) If there were many suppliers of diamonds , what would be the price and
quantity?
Would it be at a price between $7,000 and $6,000 and a quantity between 6,000 and 7,000.

(b) If there were only one supplier of diamonds, what would the price and quantity be?
Wouldn't the price be $6,000 at a quantity of 7,000.

(c) If Russia and South Africa formed a cartel, what would be the price and quantity?
Wouldn't the price be $6,000 at a quantity of 7,000.

If the countries split the market evenly, what would be South Africa’s production and profit?
Would South Africa's production be 3,500 and profit be 38,500,000.

What would happen to South Africa’s profit if it increased its production by 1,000 while Russia stuck to the cartel agreement?
The profit would increase for South Africa.

(d) Use your answer to part
(c) to explain why cartel agreements are often not successful.

Since members of the cartel seeing the need for money they increase their total revenue by cheating. Which is one of the many problems in maintaining a successful Cartel.

4. This chapter discusses companies that are oligopolists in the market for the goods they sell. Many of the same
ideas apply to companies that are oligopolists in the market for the inputs they buy.

a. If sellers who are oligopolists try to increase the price of goods they sell, what is the goal of buyers who are
oligopolists?
Isn't the goal of buyers is to get the goods at a fixed price.
b. Major league baseball team owners have an oligopoly (perhaps even a monopoly) in the market for baseball
players. What is the owners’ goal regarding player salaries?
Isn't the owners' goal is to have a fixed salary.
Why is this goal difficult to achieve?
Isn't the goal difficult because of cheating in some owners giving players more money to get that key player(s).

c. Baseball players went on strike in 1994 because they would not accept the salary cap that the owners wanted
to impose. The proposed salary cap would have established a maximum total expenditure on salaries for each
team (let the total expenditure on salaries for a team be the sum of all the player salaries for that team). If the owners were already colluding over salaries, why did the owners feel the need for a salary cap?
Wouldn't it be to prevent any desire by the players to go to other teams for a better salary.

3) Start by drawing a demand "curve". By your schedule, the demand curve could be written as P=13000-1000Q.

3a) Firms will continue to produce as long as price is above the marginal cost of 1000. So, final output Q will be very close to 12000

3b) for a monopoly, construct a marginal revenue curve. In this example, MR=13000 - 2000Q. Solve for MC=MR

3c) Cartels act like monopolists

3d) Take a shot.

4a) the goal of all buyers is to buy at the lowest price possible. (not necessarily a fixed price)
4b) same answer as 4a)

4c) some owners were "cheating" in their collusion to limit salaries, and paying higher salaries to better players. Further, better players were demanding, (and getting) higher salaries.

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