With marginal cost of $1,000 per diamond, or $1 million per thousand diamonds, the monopoly
will maximize profits at a price of $7,000 and a quantity of 6,000. Additional production beyond
this point would lead to a situation where marginal revenue is lower than marginal cost.
c. If Russia and South Africa formed a cartel, they would set price and quantity like a
monopolist, so the price would be $7,000 and the quantity would be 6,000. If they split the
market evenly, they would share total revenue of $42 million and costs of $6 million, for a total
profit of $36 million. So each would produce 3,000 diamonds and get a profit of $18 million. If
Russia produced 3,000 diamonds and South Africa produced 4,000, the price would decline to
$6,000. South Africa’s revenue would rise to $24 million, costs would be $4 million, so profits
would be $20 million, which is an increase of $2 million.
d. Cartel agreements are often not successful because one party has a strong incentive to cheat
to make more profit. In this case, each could increase profit by $2 million by producing an extra
thousand diamonds. However, if both countries did this, profits would decline for both of them.
4. a. If Mexico imposes low tariffs, then the United States is better off with high tariffs,
because it gets $30 billion with high tariffs and only $25 billion with low tariffs. If Mexico
imposes high tariffs, then the United States is better off with high tariffs, because it gets $20
billion with high tariffs and only $10 billion with low tariffs. So the United States has a dominant
strategy of high tariffs.