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CMA Foundation · Fundamentals of Business Economics and Management · Forms of Market

Wheat sells at ₹30 per kg in Market X and ₹36 per kg in Market Y, which are connected by good transport that costs ₹2 per kg. Traders can move wheat freely. Considering the tendency of price in a single market, which outcome is most likely over time?

The price difference will narrow toward the ₹2 transport cost. Traders earn ₹4 per kg by buying wheat in X and selling in Y, which raises price in X and lowers it in Y until profitable movement stops, so the markets behave as one market.

  1. AThe price difference widens to more than ₹6 because traders ignore it
  2. BThe price difference narrows toward the ₹2 transport cost as traders buy in X and sell in YCorrect
  3. CPrices in both markets become exactly ₹36
  4. DPrices in both markets fall to ₹30 and transport cost vanishes

Explanation

The gap is ₹6 against transport cost of ₹2, so traders gain ₹4 per kg by buying in X and selling in Y. Rising demand in X lifts its price and extra supply in Y lowers its price. The gap shrinks until it equals about ₹2, the transport cost. Equal prices ignore transport cost.

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