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, 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.

[Insert an image of your graph here]

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: Q_D1 = 24 - P₁, in the second period it is: Q_D2= 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.

[Insert an image of your graph here]

1. 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).

[Insert an image of your graph here]

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