Question

1. Suppose harvest season is upon us, and in your local market area supply of spring wheat is 18,000 tonnes. Demand during harvest period (and the six months afterwards) is given by (prices are per tonne):

D1 = 14000 – 10*P₁

Where D1 is demand for spring wheat in this first period, and P₁ is the price of spring wheat in the first period. Demand for spring wheat in the second period is given by:

D2 = 8000 – 6*P₂.

Where D2 is demand for and P₂ is the price of spring wheat in the second period. Storage costs between the two periods equals $20 per tonne.

1. What is the equilibrium price of spring wheat in the second period?

Answer 1

Supply of spring wheat= 18000 tonnes

Demand in period 1, D1=14000-10*P1

Demand in period 2, D2=8000-6P2

Storage cost=$20 per tonne.

In equilibrium, there should be neither excess demand, nor excess supply. Prices should be such that the demanded quantity in both the periods is exactly equal to the total supply of wheat available

Thus S=D1+D2 in equilibrium.

Whatever is not demanded in period 1 is stored for the sale in period 2, thus the total storage cost= $20(S-D1)

In second period, in order to attain the equilibrium, demand in period 2 has to be equal to supply for period 2.

S-D1=D2

Hence equilibrium price in period 2 in terms of prices in period 1 is given by above expression.