In the context of consumer surplus and willingness to pay, why might individuals choose to hold some of their wealth in liquid form rather than as illiquid assets?

• A. To facilitate immediate purchases and respond to changes in market prices
• B. To avoid all forms of transaction costs
• C. To maximize long-term returns regardless of spending needs
• D. To minimize their consumer surplus

Answer: (A)

Verified step by step guidance

1. Understand the concept of consumer surplus, which is the difference between what a consumer is willing to pay for a good or service and what they actually pay.
2. Recognize that holding wealth in liquid form means having assets that can be quickly and easily converted into cash without significant loss of value.
3. Consider the trade-off between liquidity and returns: illiquid assets often offer higher returns but cannot be quickly accessed for immediate purchases.
4. Analyze why individuals might prefer liquidity: to make immediate purchases and respond quickly to changes in market prices or unexpected needs, ensuring flexibility.
5. Conclude that holding liquid assets helps consumers maintain the ability to maximize their consumer surplus by enabling timely transactions, rather than minimizing it or avoiding all transaction costs.