Problem
Given the following information:
RD = 150 - 5*PR (Retail demand)
FS = 5 + 10*PF (Farm supply)
PR = 4 + 2*PF (Marketing margin)
1) Derive the equation for derived demand at the farm level
2) Derive the equation for derived supply at the retail leve
3) Calculate the equilibrium quantity, farm price, retail price, and marketing margin.
4) Calculate and interpret the elasticities, at the equilibrium prices and quantity, for farm and retail supply and demand. Compare the retail and farm demand elasticities, and the retail and farm supply elasticities (e.g. which ones are more elastic?).
Now assume that the marketing margin changes so that PR = 6 + 2*PF.
5) What effect does the new marketing margin have on the equilibrium quantity and farm and retail prices? Were the price changes larger at the retail level or the farm level?