Question

15. Using the consumption function: C=c+b(Y), calculate saving at income of 72,000 crores, if autonomous
{Saving = 1.050 crores)
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Answer 1

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ECONOMICS

The consumption function for an economy is given as: C = 200 + 0.8Y. (i) Determine the value of MPC and MPS; (ii) Autnomous Consumption; (iii) Derive the corresponding saving function; (iv) Calculate consumption at the income levels of Rs. 3,000 crores and Rs. 5,000 crores. (v) Determine the break-even level of income.

((i) MPC = 0.8; MPS =0.2; (ii) Autnomous Consumption = 1200 crows (iii) S = -200 + 0.20Y (iv) Rs. 2,600 crams and Rs. 4,200 crores; (v) Rs. 1,000 crores)

December 26, 2019

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Suseela Mozhi

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ANSWER

(i) Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and corresponding change in consumption.

MPC= 0.8

Marginal Propensity to save refers to the percentage change in savings for every one rupee of change in the income. It is the ratio between the change in income and its corresponding change in savings.

MPS = 1 - MPC = 1- 0.8 = 0.2

(ii) Autonomous consumption refers to that consumption which occurs when there is no income in the economy. It is the minimum level of consumption that takes place in the economy. So if income is zero, then

C = 200 + 0.8 * 0 = 200 crores

(iii) Savings function refers to the standard equation of savings which defines the relationship between savings and income where savings value can be derived at each level with the use of income value.

S= s + Y(1-b) where s=autonomous savings, (1-b)= marginal propensity to save, and Y= income.

The consumption function is C= 200+0.8Y where Y is the income at different level in the economy.

Income = consumption + savings

=> Savings = Income - consumption

=> S = Y- C

=> S = Y - ( 200 + 0.8Y)

=> S = Y- 200 - 0.8Y

=> S = - 200 + Y ( 1 - 0.8)

=> S = -200 + 0.2Y

Therefore, the saving function is S= -200 + 0.2Y where autonomous savings= -200 crores, MPS= 0.2 and Y is income at all levels.

(iv) At income level 3,000 crores,

C= 200 + 0.8 (3000)

= 200+ 2400

= Rs. 2600 crores

At income level 5000 crores,

C= 200 + 0.8 (5000)

= 200+ 4000

= Rs. 4200 crores

(v) Break even point refers to the point where the income=consumption or savings= 0. Therefore,

Y=C

=> Y= 200 +0.8 Y

=> Y- 0.8 Y=200

=> 0.2 Y = 200

=> Y= 200/0.2 = 1000 crores.