Question The majority of the worlds 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 ...there is moreshow problemThe majority of the worlds 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? Answer marginal cost of mining a diamond = $1,000 per diamond

Answer-1: When there are many buyers, this is perfect competition scenario. In that case, Price = Marginal Cost

So, Price = $1,000 Corresponding demand = 10,500 units

Answer-2: If there is only one seller, it is the scenario of monopoly. In that case, seller has monopoly and so he can charge any price he can. So, seller will charge price equal to Marginal Revenue. Here, Price = $6,000 Corresponding demand = 5,500 units

Answer-3: A cartel encourages monopoly. When there are only two players and they form a cartel, the cartel will have monopoly in the market. They will be able to act as monopolist and charge any price they want. So, Price = $6,000 Demand = 5,500 units

Since there are only two players in the market, one may be tempted to charge lower price and grab higher market share. If both parties stick to the terms and conditions and remain honest, cartel will succeed. But Country A has only rival, Country B and vice-versa, so,more often than not, there will be conflict between them. This will endanger the existence of the cartel.