Suppose each member of a diamond cartel consisting of five producers agrees to s

Question

Suppose each member of a diamond cartel consisting of five producers agrees to sell 100 carats of diamonds a day. With 500 total carats being sold, the market price is $1,000 per carat and each firm earns $100,000. Now assume that one producer cheats by producing 110 carats, causing the market price for 510 total carats to drop to $980 per carat. How does this action affect the revenues of the cheating firm and non-cheating firms? It decreases revenues by $7,800. It increases revenues by $2,000. It increases revenues by $7,800. It decreases revenues by $2,000. Suppose each member of a diamond cartel consisting of five producers agrees to sell 100 carats of diamonds a day. With 500 total carats being sold, the market price is $1,000 per carat and each firm earns $100,000. Now assume that one producer cheats by producing 110 carats, causing the market price for 510 total carats to drop to $980 per carat. How does this action affect the revenues of the cheating firm and non-cheating firms? It decreases revenues by $7,800. It increases revenues by $2,000. It increases revenues by $7,800. It decreases revenues by $2,000.

Explanation / Answer

Consider the given problem here initially all the producers are getting “$100,000”. Now, as the one producer increase its production to “110 carats”, => the price decreases to “$980”, => the total revenue earned by “Cheating firm” is given by, “980*110=107,800”, => the revenue increases by “107,800 – 100,000 = 7,800”.

Now, the revenue earned by “non-cheating firm” is given by, “980*100 = 98,000”, => the revenue decreases by “100,000 – 98,000 = 2,000”.

So, here the correct answer is given by “3rd and 4th“.

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