Question

15. If in an economy:
a) Consumption function is given by C = 100+ 0.75Y, and
(b) Autonomous investment is Rs. 150 crore
Estimate:
(i) Equilibrium level of income, and
(ii) Consumption and Savings at equilibrium level of income
OR
​

Answer 1

$\huge\fcolorbox{black}{teal}{Solution:-}$

★ Question:-

→ If in an economy, consumption function is given by C = 100 + 0.75Y, and autonomous investment is ₹150 Crore. Estimate:

i) Equilibrium level of income and

ii) Consumption and Savings at the equilibrium level of income.

★ Answer:-

i) Y = ₹1,000 Cr. and

ii) C = ₹850 Cr. & S = ₹150 Cr.

★ Explanation:-

→ Given:-

~C = 100 + 0.75Y;

~I = ₹150 Cr.

→ To Find:-

~Equilibrium level of income (Y) and

~Consumption (C) and Savings (S) at the equilibrium level of income.

→ Rationale:-

~We have,

• C = 100 + 0.75Y and

• I = ₹150 Cr.

i) At equilibrium level of income:

Y = C + I

⇒Y = 100 + 0.75Y + 150

⇒Y - 0.75Y = 250

⇒0.25Y = 250

⇒Y = 250/0.25

⇒Y = ₹1,000 Cr.

∴ The equilibrium level of income in the economy, Y = ₹1,000 Crore.

ii) • Consumption at the equilibrium level of income:

C = 100 + 0.75Y

Now, on plugging in the value of Y, we acquire;

C = 100 + 0.75(1,000)

⇒C = 100 + 750

⇒C = ₹850 Cr.

• Savings at the equilibrium level of income:

S = Y - C

⇒S = 1,000 - 850

⇒S = ₹150 Cr.

Hence,

• Equilibrium level of income (Y) = ₹1,000 Crore and
• Consumption & Savings is ₹850 Crore & ₹150 Crore respectively.

_____________________________________

Hope this helps! :)