Question

If consumption at zero level of income is 40 crores and investment multiplier is 4, then determine the, relevant consumption function. (C = 40 + 0.75 Y).

Answer 1

Autonomous consumption= 40 crores

Multiplier(k) => Change in income / change ininvestment = 1/ (1-MPC)

=> 4 = 1/(1- MPC)

=> 4 - 4 MPC = 1

=> 4 MPC = 3

=> MPC = 3/4 = 0.75

Consumption function refers to the standard equation of consumption which defines the relationship between consumption and income where consumption value can be derived at each level with the use of income value.

C= c+ bY where c=autonomous consumption, b= marginal propensity to consume, and Y= income.

So, C= 40 + 0.75 Y where Autonomous consumption= 40 crores, MPC= 0.75 and Income= Y.