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i=1
S(t
i
)e
rt
i
t.
Letting t 0, i.e. n , we obtain
PV =
M
0
S(t)e
rt
dt.
The future value is given by
FV = e
rM
M
0
S(t)e
rt
dt.
Example 14.2
An investor is investing $3.3 million a year in an account returning 9.4%
APR. Assuming a continuous income stream and continuous compounding
of interest, how much will these investments be worth 10 years from now?
Solution.
Using the formula for the future value dened above we nd
FV = e
.94
10
0
3.3e
0.094t
dt $54.8million.
2
Example 14.3
At what constant, continuous rate must money be deposited into an account
if the account contain $20,000 in 5 years? The account earns 6% interest
compounded continuously.
Solution.
Given FV = $20, 000, M = 5, r = 0.06. Since S is assumed to be constant,
we have
20, 000 = S
5
0
e
0.06t
dt.
Solving for S we nd
S =
20, 000
5
0
e
0.06t
dt
$4, 630 per year.
Supply and Demand Curves
The quantity q manufactured and sold depends on the unit price p. In gen-
eral, when the price goes up then manufacturers are willing to supply more
of the product whereas consumers are going to reduce their buyings. Since
consumers and manufacturers react dierently to changes in price, there are
two curves relating p and q.
Demand tells us the price that consumers would be willing to pay for
each dierent quantity. According to the law of demand, when the price
increases the demand decreases and when the price decreases the demand
increases. The graphical representation of the relationship between the quan-
tity demanded of a good and the price of the good is known as the demand
curve.
Supply tells us the price that producers would be willing to charge in order
to sell the dierent quantities. The law of supply asserts that as the price
of a good rises, the quantity supplied rises, and as the price of a good falls
the quantity supplied falls. The graphical representation of the relationship
between the quantity supplied of a good and the price of the good is known
as the supply curve.
Even though quantity is a function of price, it is the tradition to use the verti-
cal yaxis for the variable p and the horizontal xaxis for the variable q. The
demand and supply curve intersects at the point of equilibrium (q
, p
).
We call p
) = D(q
) to obtain
q
3
+
50
3
=
q
2
+ 50. Multiply
through by 6 to obtain 2q
+100 = 3q
+300. By adding 3q
100 to both
sides we obtain 5q
we nd q
= 30.
Consumer and Producer Surplus
Consumers Surplus
At the equilibrium level, a number of consumers have bought the item at a
lower price that they would have been willing to pay. (For example, there are
some consumers who would have been willing to pay prices up to p
1
.) Simi-
larly, there are some suppliers who would have been willing to produce the
item at a lower price, for example, down to p
0
. We dene the following terms:
At the equilibrium level, the consumers surplus is the dierence be-
tween what consumers are willing to pay and their actual expenditure: It
therefore represents the total amount saved by consumers who were willing
to pay more than p
i=1
D(q
i
)q.
Letting q 0 to obtain (See Figure 53.2(a))
Total Expenditure =
0
D(q)dq.
This is the consumer expenditure if all consumers are willing to pay more
than p
.
Figure 14.2
Now, if all the goods are sold at the equilibrium price, the consumers actual
expenditure is only p
. Thus,
Consumers
Surplus =
0
(D(q) p
)dq.
Graphically, it is the area between demand curve and the horizontal line at
p
Surplus =
0
(p
S(q))dq.
Graphically, it is the area between suuply curve and the horizontal line at
p
= 10.
Substituting this into the supply (or demand) equation we nd the equilib-
rium price p
Surplus :
10
0
60
q
2
10
50
dq = 10q
q
3
30
10
0
$66.67
Producers
Surplus :
10
0
50
30 +
q
2
5
dq = 20q
q
3
15
10
0
$133.33
6