Question

Find 'investment' from the following: National Income = Rs. 500; Autonomous consumption = Rs. 100; Marginal propensity to consume = 0.75

Answer 1

If Autonomous consumption is Rs. 100 and MPC= 0.75, then

Consumption Function, C = 100+ 0.75 Y where Y in the income in the economy.

So at national income Rs. 500, consumption is

C = 100+ 0.75 ( 500)

= 100 + 375

= Rs. 475.

At equilibrium,

National income= consumption + investment

=> Investment= Y- C

=> Investment= 500-475= Rs. 25.