The marginal valuation of the good, establish the consumer surplus and derive the demand curve. Concept Introduction: Consumer Surplus – The excess of consumers’ willingness to pay over what they actually pay (the ability to pay) for a good or service relative to the market price is the economic measure of consumer benefit known as the consumer surplus. Law of demand – The law states that as the price of a commodity falls its quantity demanded increases and vice versa, assuming all other variables to be constant. Linear Demand Equation – It expresses the quantity demanded as a function of price in the form, Qd= b + mp where b is the intercept and the slope m is constant. In other words, change in Qd with a one unit change in price is constant for a linear demand function. Law of Diminishing Marginal Utility – The law states that we consume more and more of a commodity, keeping the consumption of all other variables constant, the utility derived from the consumption of every additional unit diminishes. The marginal utility thus diminishes.

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A linear programming computer package is needed. As part of the settlement for a class action lawsuit, Hoxworth Corporation must provide sufficient cash to make the following annual payments (in thousands of dollars). Year 1 2 3 4 5 6 Payment 170 195 220 265 295 440 The annual payments must be made at the beginning of each year. The judge will approve an amount that, along with earnings on its investment, will cover the annual payments. Investment of the funds will be limited to savings (at 4% annually) and government securities, at prices and rates currently quoted in The Wall Street Journal. Hoxworth wants to develop a plan for making the annual payments by investing in the following securities (par value = $1,000). Funds not invested in these securities will be placed in savings. Security Current Price Rate (%) Years to Maturity 1 $1,055 6.750 3 2 $1,000 5.125 4 Assume that interest is paid annually. The plan will be submitted to the judge and, if approved,…

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Chapter 6, Problem 7P

To determine

The marginal valuation of the good, establish the consumer surplus and derive the demand curve.

Concept Introduction:

Consumer Surplus – The excess of consumers’ willingness to pay over what they actually pay (the ability to pay) for a good or service relative to the market price is the economic measure of consumer benefit known as the consumer surplus.

Law of demand – The law states that as the price of a commodity falls its quantity demanded increases and vice versa, assuming all other variables to be constant.

Linear Demand Equation – It expresses the quantity demanded as a function of price in the form, Qd= b + mp where b is the intercept and the slope m is constant. In other words, change in Qd with a one unit change in price is constant for a linear demand function.

Law of Diminishing Marginal Utility – The law states that we consume more and more of a commodity, keeping the consumption of all other variables constant, the utility derived from the consumption of every additional unit diminishes. The marginal utility thus diminishes.

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