Question

If MPC is four times MPS and consumption at zero level of income is Rs. 70 crores, derive the consumption function. (C = 70 + 0.80 Y)

Answer 1

Since MPC+ MPS= 1

=> 4MPS +MPS= 1

=> 5 MPS =1

=> MPS = 1/5 = 0.2

Therefore, MPC= 0.8

Autonomous consumption refers to that consumption which occurs when there is no income in the economy. It is the minimum level of consumption that takes place in the economy.

So, Autonomous consumption = Rs. 70 crores

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= 70 + 0.8 Y where 70 crores=autonomous consumption, o.8= marginal propensity to consume, and Y= income.