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 follows:
price quantity
6,000 5,500
5,000 6,500
4,000 7,000
3,000 8,000
2,000 9,000
1,000 10,000
1. If there were MANY sellers of diamonds, what would equilibrium price and quantity? Why?
2. If there were only one seller, what would be the equilibrium price and quantity? Why?
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?
*please show how you would work out each individual question, i am confused and have no one to help me. please show work and justification of your answers.
thank you-mary
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.
1. If there were MANY sellers of diamonds, the equilibrium price and quantity can be determined by finding the point where the quantity demanded equals the quantity supplied. In this case, we have the demand schedule and assume that each seller has a marginal cost of $1,000.
To find the equilibrium price and quantity, we need to identify the price level at which the quantity demanded equals the quantity supplied. We start from the highest price level and move down to lower prices, checking at each step if the quantity demanded equals the quantity supplied.
Looking at the demand schedule, we see that at a price of $6,000, the quantity demanded is 5,500. Since the marginal cost is $1,000, every seller is willing to supply their diamond at this price. However, the total quantity supplied by all sellers is not enough to meet the demand of 5,500.
We continue to the next price level of $5,000, where the quantity demanded is 6,500. Again, each seller is willing to supply their diamonds at this price. The total quantity supplied by all sellers is now sufficient to meet the demand.
Therefore, the equilibrium price and quantity will be $5,000 and 6,500, respectively, because at this price level, the quantity supplied by all sellers matches the quantity demanded by the buyers.
2. If there were only one seller, the equilibrium price and quantity would be solely determined by their marginal cost of $1,000. In this case, the single seller would have full control over the market and can set the price to maximize their profit.
To maximize profit, the seller would select the quantity at which marginal cost equals marginal revenue. Since the marginal cost is $1,000, the seller would set the price above $1,000 to maximize their profit. However, the exact price level cannot be determined without additional information about the demand schedule.
3. If Country A and Country B formed a cartel, they would act as one seller and could collectively decide on the price and quantity produced. The cartel would aim to maximize their joint profits.
To find the equilibrium price and quantity for the cartel, we need to determine the quantity at which the marginal cost equals the marginal revenue for the entire cartel. Since the marginal cost for each diamond is $1,000, the total marginal cost for the cartel is the sum of the individual marginal costs.
To maximize their joint profits, the cartel would set the price above the marginal cost but below the price level at which the quantity demanded drops significantly. The exact price and quantity would depend on how Country A and Country B negotiate and coordinate their actions.
However, the cartel may not be likely to survive in the long run. Other diamond-producing countries or companies may enter the market to take advantage of the artificially higher price set by the cartel. Additionally, individual countries within the cartel may be tempted to cheat and sell diamonds independently at lower prices to gain a competitive advantage. Disagreements and conflicts of interest among the cartel members could also lead to the collapse of the cartel over time.