Question

The consumption curve makes an intercept of Rs. 60 crores on the Y-axis. MPC:MPS can be expressed as 1:3, then derive the saving and consumption function. Also determine the level of income, when saving becomes zero?
(Saving Function: S = -60 + 0.75 (Y); Consumption Function: C = 60 + 0.25 09; Saving will become zero at income of Rs. 80 acres)

Answer 1

Autonomous consumption= Rs. 60 crores

MPC/MPS= 1/3. Since

MPC+MPS= 1

=> MPC+ 3 MPC = 1

=> 4 MPC = 1

=> MPC = 1/4 = 0.25.

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.

Therefore, C = 60 + 0.25 Y where 60 crores=autonomous consumption, 0.25= marginal propensity to consume, and Y= income.

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= 60+0.25 Y where Y is the income at different level in the economy.

Income = consumption + savings

=> Savings = Income - consumption

=> S = Y- C

=> S = Y - ( 60 + 0.25 Y)

=> S = Y- 60 - 0.25 Y

=> S = - 60 + Y ( 1 - 0.25)

=> S = -60 + 0.75 Y

Therefore, the saving function is S= -60 + 0.75 Y where autonomous savings= -60 crores, MPS= 0.75 and Y is income at all levels.

Break even point refers to the point where the income=consumption or savings= 0. Therefore,

S= 0

=> - 60 + 0.75 Y = 0

=> 0.75 Y= 60

=> Y = 60 / 0.75 = Rs. 80 crores.