In the cobweb model of farm output, the demand D for a crop depends on the current price P, but the supply S depends on the price the previous period because crops must be planted before they can be harvested:

where β₁ and β₂ are positive parameters. If demand is equal to supply, what must be true of β₁ and β₂ for prices to converge to an equilibrium value? If the model is stable, will it be monotonically stable or cyclically stable?

Transcribed Image Text:

D = - BP S =+BP1-1