Using the equation of consumption function: C= C +b(Y), calculate… - Vidyadip

Question

Using the equation of consumption function: $\text{C}=\bar{\text{C}}+\text{b}(\text{Y}),$ calculate consumption expenditure at the income level of ₹ 1000 crore, if autonomous consumption is ₹ 20 crore and 20% of additional income is saved.

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Answer

Given, MPS = 0.2(as 20% of additional income is saved).
MPC or b = 1 - MPS = 1 - 0.2 = 0.8 Given, Autonomous Consumption () = ₹ 20 crore, Income (Y) = ₹ 1000 crore Putting the values of b, $\bar{\text{C}}$ and Y in the consumption function, we get, C = 20 + 0.8 1000 = ₹ 820 crore Consumption expenditure (C) = ₹ 820 crore. The saving curve of an economy makes a negative intercept of ₹ 20 crore and 10% of additional income is saved. Derive the saving and consumption function.

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