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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

A large share of the world supply of diamonds comes from Russia and South Africa. Suppose that the marginal cost of mining diamonds is constant at $1,000 per diamond and the demand for diamonds is described by the following schedule:

Price Quantity
$8,000 5,000 diamonds
7,000 6,000
6,000 7,000
5,000 8,000
4,000 9,000
3,000 10,000
2,000 11,000
1,000 12,000

a. If there were many suppliers of diamonds, what would be the price and quantity?

b. If there were only one supplier of diamonds, what would be the price and quantity?

c. If Russia and South Africa formed a cartel, what would be the price and quantity? If the countries split the market evenly, what would be South Africa’s production and profit? What would happen to South Africa’s profit if it increased its production by 1,000 while Russia stuck to the cartel agreement?

d. Use your answers to part (c) to explain why cartel agreements are often not successful.

Subpart (a):

To determine
Equilibrium price.

Explanation

The profit maximizing firm would produce output at the point where the marginal revenue is equal to or just exceeds marginal cost. Marginal revenue is equal to price...

Subpart (b):

To determine
Calculation of marginal revenue.

Sub part (c):

To determine
Calculation of profit.

Subpart (d):

To determine
What would be the price and quantity of diamond in Russia and South Africa after formation of cartel.

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