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Determination of Income and Employment — Economics STD 12 Commerce — Question

CBSE BoardEnglish MediumSTD 12 CommerceEconomicsDetermination of Income and Employment6 Marks
Question
On the basis of consumption function C = 100 + 0.75Y, answer the following questions:
  1. Derive the saving function.
  2. Determine the saving at the income level of ₹ 1000 crore.
  3. At what level of income, saving becomes zero?
✓

Answer

  1. We know, Consumption function is expressed as $\text{C}=\bar{\text{C}}+\text{bY},$
It means: 100 is the autonomous consumption $(\bar{\text{C}})$ and 0.75 indicates MPC or b,

Saving Function is given as,

$\text{S}=-\bar{\text{C}}+(1-\text{b})\text{Y}$

MPS or (1 - b) = 1 - MPC

= 1 - 0.75 = 0.25

Putting the values of (1 - b) or MPS and $-\bar{\text{C}},$ we get; S = -100 + 0.25 (Y).
  1. For saving at income (Y) of ₹ 1000 crore, putting the values of (1 - b), and Y in the saving function, we get; S = -100 + 0.25 1000 = ₹ 150 crore.
  2. Saving will become zero at break-even point, i.e., when Y = C.
Replacing C with Y in the consumption function to determine the break-even point,

$\text{Y}=100+0.75\text{Y}$

$\text{Y}-0.75\text{Y}=100$

$\text{Y}(1-0.75)=100,$

$\text{Y}=\frac{100}{0.25}=400\text{ crore},$

Saving will become zero at income

level of ₹ 400 crore.

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