Problem: The marginal cost of mining a diamond is a constant $1,000. The following schedule shows demand for diamonds that are mined in South Africa and Russia.
Price ($) Quantity
8,000 5,000
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
Question 1: If Russia and South Africa formed a cartel, how many diamonds would each produce and what price would they sell at?
Question 2: If only South Africa breaks the cartel agreement and increases production by 1,000 diamonds, what is South Africa's profit? What is Russia's profit?
Question 3: If Russia retaliates and increases production by 1,000 units, calculate each country's profit?
Question 4: Does South Africa have an incentive to increase production? Why or Why not?