Question

Demand in Market 1: D1 = 24 - P1

Supply in Market 1: S1 = -2+ P1

Demand in Market 2: D2 = 19 - P2

Supply in Market 2: S2 = 2 + P2

1. If no trade occurs between the markets, what are the equilibrium values of D₁, S_1, P_1, D₂, S₂, and P₂? Solve algebraically.

2. If the cost of transportation between the two markets is P_T = 2, what would be the equilibrium values of D₁, S₁, P_1, D₂, S₂, P₂, Q_T, and P_T? Solve algebraically.

3. Show the above situation graphically, both with and without trade. Please label everything.

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.  

4. 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.

5. 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).

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

Answer 1