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Production Possibility Frontier

Derive a stra...

Question

Derive a straight line saving curve using the following consumption function: C = 20 + 0.6 Y. Presuming the income levels to be Rs. 100, Rs. 200 and Rs. 300 crores. Also calculate that level of income where consumption is equal to income.

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Solution

Income(Y)

Consumption (C)

Savings (S)

100

80

20

200

140

60

300

200

100

When, Income= Consumption
=> Y= C
=> Y= 20 + 0.6 Y
=> Y- 0.6 Y= 20
=> 0.4 Y= 20
=> Y = 200/ 0.4=50.
Hence when Income is Rs. 50, then consumption is equal to income.

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