On the basis of given diagram, answer the following questions:
(i) What is the value of autonomous consumption?
(ii) What is the break-even level of Income or at what level of income saving is zero?
(iii) How much is APC corresponding to point E?
(iv) If MPC = 0.6, determine the consumption and saving function.

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Solution

(i) Consumption curve makes an intercept of 40 crores on the Y-axis. So, Autonomous Consumption = Rs. 40 crores.

(ii) Break-even point occurs when Consumption = Income (or Saving = 0)
So, Break-even level of income = Rs. 100 crores.

(iii) At point E, C = Y= Rs. 100 crores. So APC $= \frac{C o n s u m p t i o n (C)}{I n c o m e (Y)} = \frac{100}{100} = 1$

(iv) Consumption Function is given as: $C = ¯ c + b (Y)$
Autonomous Consumption $¯ (c)$ =Rs. 40 crores and b(MPC) = 0.6
Thus, C = 40 + 0.6 Y

Saving Function is given as: S = - $¯ (c)$ + (1 - b)Y
MPS(1 - b) = 1 -MPC = 1 - 0.6 = 0.4
Thus, S = -40 + 0.4 Y.

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