Question

Calculate equilibrium level of income from the following:
(i) Consumption expenditure at zero income Rs. 40
(ii) Marginal Propensity to Consume 0.8
(iii) Investment Rs. 80
(Equilibrium level of income =Rs. 600)

Answer 1

Consumption Function, C = 40+ 0.8 Y where Y in the income in the economy.

At equilibrium level of output,

AS=AD

Y= C+I

=> Y= 40 + 0.8 Y + 80

=> Y - 0.8 Y = 40 + 80

=> 0.2 Y = 120

=> Y = 120/ 0.2 = Rs. 600.