The consumption function for an economy is given as: C = 200 + 0.8Y. (i) Determine the value of MPC and MPS; (ii) Autnomous Consumption; (iii) Derive the corresponding saving function; (iv) Calculate consumption at the income levels of Rs. 3,000 crores and Rs. 5,000 crores. (v) Determine the break-even level of income.
((i) MPC = 0.8; MPS =0.2; (ii) Autnomous Consumption = 1200 crows (iii) S = -200 + 0.20Y (iv) Rs. 2,600 crams and Rs. 4,200 crores; (v) Rs. 1,000 crores)
((i) MPC = 0.8; MPS =0.2; (ii) Autnomous Consumption = 1200 crows (iii) S = -200 + 0.20Y (iv) Rs. 2,600 crams and Rs. 4,200 crores; (v) Rs. 1,000 crores)
(i) 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= 0.8
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- 0.8 = 0.2
(ii) 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 if income is zero, then
C = 200 + 0.8 * 0 = 200 crores
(iii) 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+0.8Y where Y is the income at different level in
the economy.
Income = consumption +
savings
=> Savings = Income
- consumption
=> S = Y- C
=> S = Y - ( 200 +
0.8Y)
=> S = Y- 200 - 0.8Y
=> S = - 200 + Y ( 1
- 0.8)
=> S = -200 +
0.2Y
Therefore, the saving
function is S= -200 + 0.2Y where autonomous savings= -200 crores, MPS= 0.2 and Y is income at all
levels.
(iv) At income level 3,000 crores,
C= 200 + 0.8 (3000)
= 200+ 2400
= Rs. 2600 crores
At income level 5000
crores,
C= 200 + 0.8 (5000)
= 200+ 4000
= Rs. 4200
crores
(v) Break even
point refers to the point where the income=consumption or savings= 0.
Therefore,
Y=C
=> Y= 200 +0.8 Y
=> Y- 0.8 Y=200
=> 0.2 Y = 200
=> Y= 200/0.2 = 1000
crores.
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- 0.8 = 0.2
(ii) 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 if income is zero, then
C = 200 + 0.8 * 0 = 200 crores
(iii) 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+0.8Y where Y is the income at different level in the economy.
Income = consumption + savings
=> Savings = Income - consumption
=> S = Y- C
=> S = Y - ( 200 + 0.8Y)
=> S = Y- 200 - 0.8Y
=> S = - 200 + Y ( 1 - 0.8)
=> S = -200 + 0.2Y
Therefore, the saving function is S= -200 + 0.2Y where autonomous savings= -200 crores, MPS= 0.2 and Y is income at all levels.
(iv) At income level 3,000 crores,
C= 200 + 0.8 (3000)
= 200+ 2400
= Rs. 2600 crores
At income level 5000 crores,
C= 200 + 0.8 (5000)
= 200+ 4000
= Rs. 4200 crores
(v) Break even point refers to the point where the income=consumption or savings= 0. Therefore,
Y=C
=> Y= 200 +0.8 Y
=> Y- 0.8 Y=200
=> 0.2 Y = 200
=> Y= 200/0.2 = 1000 crores.
