Question

The saving function is given as: S.-120+ 0.4 (Y). Determine: (i) Consumption function; (ii) Consumption at income level of f 600 crores; (ii) Break-even level of income.
((i) C =120+ 0.60 (Y); (it) Rs. 480 crores; (iii) Rs. 1300 crores)

Answer 1

(i) S= -120+0.4 Y

C+S=Y

=> C = Y-S

= Y - (-120+0.4Y)

= Y + 120 - 0.4 Y

= 120 + 0.6 Y

Hence, C = 120 + 0.6 Y

(ii) At income level 600 crores,

C= 120 + 0.6 (600)

= 120+ 360

= 480 crores

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

Y=C

=> Y= 120 +0.6 Y

=> Y- 0.6 Y=120

=> 0.4 Y = 120

=> Y= 120/0.4 = 300 crores.