Question

If Consumption Function is given by: C = 30 + 0.4 Y, then determine: (i) Savings; (ii) MPC; (iii) MPS; (iv) Break-even level of Income; (v) Saving Function.
((i) -30; (ii) 0.4; (iii) 0.6; (iv) 50; (v) S = -30 + 0.6 Y)

Answer 1

(i) Savings at zero level of income is -30.

(ii) Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and corresponding change in consumption.

MPC= 0.4

(iii) Marginal Propensity to save refers to the percentage change in savings for every one rupee of change in the income. It is the ratio between the change in income and its corresponding change in savings.

MPS= 1- MPC= 1- 0.4 = 0.6.

(iv) Break even level of income refers to that income where the income=consumption or savings= 0. Therefore,

Y=C

=> Y= 30 +0.4 Y

=> Y- 0.4 Y=30

=> 0.6 Y = 30

=> Y= 30/0.6 = 50.

(v) Savings function refers to the standard equation of savings which defines the relationship between savings and income where savings value can be derived at each level with the use of income value.

S= s + Y(1-b) where s=autonomous savings, (1-b)= marginal propensity to save, and Y= income.

The consumption function is C= 30+0.4Y where Y is the income at different level in the economy.

Income = consumption + savings

=> Savings = Income - consumption

=> S = Y- C

=> S = Y - ( 30 + 0.4Y)

=> S = Y- 30 - 0.4Y

=> S = - 30 + Y ( 1 - 0.4)

=> S = -30 + 0.6Y

Therefore, the saving function is S= -30 + 0.6Y where autonomous savings= -30 crores, MPS= 0.6 and Y is income at all levels.