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 7,500
3,000 8,500
2,000 9,500
1,000 10,500
If there were MANY sellers of diamonds, what would equilibrium price and quantity? Why?
If there were only one seller, what would be the equilibrium price and quantity? Why?
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?
To find the equilibrium price and quantity, we need to analyze the supply and demand schedules. In this scenario, we are given only the demand schedule and the marginal cost of mining a diamond. However, since we are not given the supply schedule, we cannot directly calculate the equilibrium price and quantity.
Let's first define some terms:
- Equilibrium price: The price at which the quantity demanded equals the quantity supplied.
- Equilibrium quantity: The quantity at which the quantity demanded equals the quantity supplied.
1. If there were MANY sellers of diamonds:
In a competitive market with many sellers, the market price is determined by the interaction of supply and demand. Since we don't have the supply schedule, we cannot determine the exact equilibrium price and quantity. However, we can say that in the long run, competition among many sellers would likely push the price towards the marginal cost of mining a diamond, which is $1,000. The equilibrium quantity would depend on the intersection of the demand and supply curves.
2. If there were only one seller:
If there were only one seller, also known as a monopoly, they would have the power to set both the price and quantity. In this case, the monopolist would choose the price and quantity combination that maximizes their profit or meets their objectives. Since the marginal cost of mining a diamond is $1,000, the monopolist could choose any price above $1,000 depending on market conditions and their strategic considerations. The equilibrium price and quantity would be determined by the monopolist's decision-making.
3. If Country A and Country B formed a cartel:
A cartel is a group of competitors that collude to restrict output and raise prices in order to increase their collective profits. If Country A and Country B formed a cartel, they would have the power to control the supply of diamonds in the market. In this scenario, they could agree to jointly restrict their diamond production to reduce supply and increase prices.
The equilibrium price and quantity under a cartel would depend on the cartel's production agreement and the resulting supply curve. If the cartel successfully limits supply, they can push the price higher than the marginal cost of $1,000. The equilibrium price and quantity would be determined by the cartel members' decisions regarding their production levels.
However, the stability and effectiveness of a cartel depend on various factors. Cartels often face challenges such as member discipline, cheating, and external market forces. If cartel members cheat by secretly increasing production, the supply and price dynamics can be disrupted. Furthermore, external market forces, such as new entrants or substitute products, can undermine the cartel's market power.
So, in summary, to determine the exact equilibrium price and quantity in each scenario, we would need the supply schedule. However, we can make some general observations about the possible outcomes.