Markets: A Rigorous Course

M10 · Problem 3 ★★ Check

A two-period storage equilibrium

Inverse demand in each period is P(q)=200−qP(q) = 200 - q. The interest rate is zero and storage costs k=2k = 2 per unit carried from period 1 to period 2. Period-2 harvest is 60 or 140 with equal probability. Storers are competitive and risk neutral. (a) With period-1 harvest h1=100h_1 = 100, find equilibrium inventory II, S1S_1, E[S2]\mathbb{E}[S_2] and the one-period futures price F1=E[S2]F_1 = \mathbb{E}[S_2]. Is the market at full carry? (b) Repeat with h1=120h_1 = 120. (c) Interpret (a) and (b) with Propositions 10.3 and 10.4.

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