Discuss the following:
Part 1: Spatial Equilibrium
The demand in market 1 is D1 = 24 - P1
The supply in market 1 is S1 = -2 + P1
The demand in market 2 is D2 = 16 - P2
The supply in market 2 is S2 = 2 + P2
1. If no trade occurs between the markets, what are the equilibrium values of D1, S1, P1, D2, S2, and P2? Solve algebraically.
2. If the cost of transportation between the two markets is PT = 2, what would be the equilibrium values of D1, S1, P1, D2, S2, P2, QT, and PT? Solve algebraically.
3. Show the above situation graphically, both with and without trade. Please label everything.
Part 2: 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: QD1 = 24 - P1, in the second period it is: QD2= 18 - P2.
1. 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.
2. 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).
3. By comparing the results for 5 and 6 above explain how the cost of storage affects prices and quantities in each period.