Question

Storage Equilibrium

Assume that the market supply curve for potatoes is Qs₁ = 12 + 0.5P, and that there are two marketing periods for the crop. In the first marketing period the demand curve is: Q_D1 = 24 – P₁, in the second period it is: Q_D2= 18 - P₂.

Draw a graph of the markets in the two periods showing prices and quantities if it costs nothing to store potatoes. Be sure to label all the relevant features on your graph.

[Insert an image of your graph here]

Show the prices and quantities in each period if it costs $5 per cwt. to store potatoes for delivery in the second marketing period. Again, be sure to label all relevant features on your graph (s).

[Insert an image of your graph here]

By comparing the results for 5 and 6 above explain how the cost of storage affects prices and quantities in each period.

Answer 1