Question

Calculate 'Investment' from the following:
(i) Equilibrium income Rs. 500
(ii) Consumption expenditure at zero income Rs. 50
(iii) Marginal propensity to consume 0.7

Answer 1

(i) Consumption Function, C = 50+ 0.7 Y where Y in the income in the economy.

At equilibrium,

AS=AD

Y= C+I

=> 500= 50 + 0.7 ( 500) + I

=> 500 = 50 + 350 +I

=> 500 = 400 + I

=> I = 500- 400 = 100

Hence, Investment is Rs. 100 at equilibrium.