Question

on the basis of consumption function c= 120+0.4y, answer the following questions
I)- derive saving function
2)- determine savings at the income level of 500 crores
3- at what level of income, s=0
​

Answer 1

Explanation:

S= -120+0.4 Y

C+S=Y

=> C = Y-S

= Y - (-120+0.4Y)

= Y + 120 - 0.4 Y

= 120 + 0.6 Y

Hence, C = 120 + 0.6 Y

(ii) At income level 600 crores,

C= 120 + 0.6 (600)

= 120+ 360

= 480 crores

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

Y=C

=> Y= 120 +0.6 Y

=> Y- 0.6 Y=120

=> 0.4 Y = 120

=> Y= 120/0.4 = 300 crores.