Question

The break-even point for an economy occurs at the income level of ? 500 crores if marginal propensity to consume is 0.6, determine: (i) Autonomous consumption; (ii) Saving function; (iii) Level of Income when saving is ? 600 crores.
((i) Rs. 200 crows; (ii) - 200 + 0.4 (Y); Rs. 2000 cares)

Answer 1

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

Y=C

=> C= 500 crores

=> c+ 0.6 Y = 500

=> c + 0.6 (500) = 500

=> c = 500 - 300

=200.

Therefore, autonomous consumption is 200 crores.

C= 200 + 0.6 Y is the consumption function.

(ii) 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= 200+0.6Y where Y is the income at different level in the economy.

Income = consumption + savings

=> Savings = Income - consumption

=> S = Y- C

=> S = Y - ( 200 + 0.6 Y)

=> S = Y- 200 - 0.6 Y

=> S = - 200 + Y ( 1 - 0.6)

=> S = -200 + 0.4 Y

Therefore, the saving function is S= -200 + 0.4 Y where autonomous savings= -200 crores, MPS= 0.4 and Y is income at all levels.

(iii)When savings is 600 crores, then income will be as follow.

S= 600

=> -200 + 0.4 Y= 600

=> 0.4 Y = 800

=> Y = 800/ 0.4 = 2000 crores.