Answer
a) Since there are multiple suppliers, 12,000 diamonds would be sold at a price of 1,000 dollars.
b) The firm would produce 6,000 diamonds for 7,000 dollars each.
c) The cartel would also produce 6,000 diamonds for 7,000 dollars each. South Africa would produce 3,000 diamonds and make a profit of 18 million dollars. However, if South Africa increased its production to 4,000 diamonds (and Russia kept their production the same at 3,000 diamonds), South Africa's profit would increase to 20 million dollars.
d) Neither country has an incentive to agree to the cartel due to higher profit-earning potential (by producing more diamonds). If both countries increased their output, their profits would decline.
Work Step by Step
a) Firms compete until the marginal cost and the price are the same (in an oligopoly).
b) With one firm, the firm would produce to the point where marginal cost and marginal revenue are the same. Please see the table.
c) The cartel would act like a monopoly, so that's why the cartel would produce the same quantity as the monopoly.
Profit = revenue - costs
$P = 3000*7000-3000*1000$
$P = 21000000-3000000$
$P = 18$ million dollars
Profit = revenue - costs
$P = 4000*6000-4000*1000$
$P = 24000000-4000000$
$P = 20$ million dollars
