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 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?
To determine the equilibrium price and quantity in different scenarios, we need to understand the concept of equilibrium in economics. Equilibrium occurs when the quantity demanded is equal to the quantity supplied, resulting in no inherent tendency for price or quantity to change.
1. If there were MANY sellers of diamonds, the equilibrium price and quantity can be determined by comparing the demand and supply. In this case, the marginal cost of mining a diamond is $1,000.
To determine the equilibrium price and quantity, we need to find the point where the quantity demanded equals the quantity supplied. Looking at the demand schedule:
At a price of $6,000, the quantity demanded is 5,500.
At a price of $5,000, the quantity demanded is 6,500.
At a price of $4,000, the quantity demanded is 7,500.
At a price of $3,000, the quantity demanded is 8,500.
At a price of $2,000, the quantity demanded is 9,500.
At a price of $1,000, the quantity demanded is 10,500.
Comparing these quantities demanded to the marginal cost of mining, we can see that at a price of $6,000, the quantity supplied would be lower than demanded, as the marginal cost of mining is only $1,000. Therefore, the equilibrium price and quantity would be $5,000 and 6,500 diamonds, respectively.
2. If there were only one seller (a monopolist), the equilibrium price and quantity would be determined solely by the monopolist's decision-making. The monopolist would aim to maximize profits and would consider the demand schedule and marginal cost.
In this case, the monopolist's marginal cost of mining a diamond is $1,000. To maximize profit, the monopolist would choose the quantity at which marginal revenue (the additional revenue from selling one more unit) equals marginal cost. Looking at the demand schedule, the monopolist would produce and sell the quantity of diamonds where the marginal revenue equals $1,000.
Without specific marginal revenue information, it is difficult to determine the exact equilibrium price and quantity. However, the monopolist is likely to produce and sell a quantity less than the competitive equilibrium quantity to maximize their profit.
3. If Country A and Country B formed a cartel, they would aim to coordinate their actions to control the supply and influence the price in their favor. The equilibrium price and quantity would depend on the cartel's decisions.
The cartel members (Country A and Country B) would collectively determine the quantity to produce, aiming to maximize their joint profits. They would likely restrict the supply of diamonds to increase the price above the competitive equilibrium level.
However, the cartel's ability to maintain higher prices and restrict supply depends on various factors, including the potential for defection among cartel members, the presence of non-cartel producers, the demand elasticity of diamonds, and the ability to enforce agreements. If members cheat on the agreement or non-cartel producers increase their production, the cartel may lose control over the market, leading to a collapse in the price and the cartel's survival becoming doubtful.
In summary:
1. Equilibrium price and quantity with many sellers: $5,000 and 6,500 diamonds, respectively.
2. Equilibrium price and quantity with a monopolist: It depends on the monopolist's decision-making and profit maximization.
3. Equilibrium price and quantity with a cartel: It depends on the cartel's decisions and ability to control supply. The cartel's survival is uncertain and depends on various factors.