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 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?

1. If there were MANY sellers of diamonds, what would equilibrium price and quantity? Why? Price would be very likely to be equal to the marginal cost : $1,000, and at that price level, the demand quantity would be 10,500. The reason is, when there is huge competition among sellers, they tend to lower the price to attract more customers, hence they will have no control over the price. The market will be that of perfect competition where P=MC 2. If there were only one seller, what would be the equilibrium price and quantity? Why? When there is only one seller, the seller has total control of the price they will sell the diamond at. In this case, the firm will set a price where they can earn maximum profit. It has to be noted that the higher the price, the lower the demand will become. The company will set the price where profit is maximized.
Unit Price 6,000 5,000 4,000 3,000 2,000 1,000 quantity 5,500 6,500 7,500 8,500 9,500 10,500 Total Price 33,000,000 32,500,000 30,000,000 25,500,000 19,000,000 10,500,000 MC 5,500,000 6,500,000 7,500,000 8,500,000 9,500,000 10,500,000 Contribution 27,500,000 26,000,000 22,500,000 17,000,000 9,500,000 0

From table above, we can see highest profit is achievable when price is $6,000 and quantity is 5,500 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 theory, If cartel is formed between the two country, they can set the price at that which maximizes profit. i.e at $6,000 and equilibrium quantity of 5,500. However, the success of the cartel in practical term depends on many factors, the most important of which is the reliability of the loyalty of both parties. Furthermore, due to branding, marketing. Customer service etc, in the long run, one country might become more popular and more preferred than the other, this will disturb the balance and might cause one or both party to break promises in the process of controlling their market share. As such, it is very seldom that cartel to control prices lasts in the long term