You are given the consumption function of an imaginary economy, C = 100 + 0.8 Y, where C = Consumption and Y = Income. Calculate : (i) The value of Marginal Propensity to Save (MPS) (ii) The level of income at Break-Even Point S = – 60 + 0.1 Y is the saving function, where S is Saving and Y is National Income and Investment Expenditure (I) is Rs. 4,000 crore in an economy. Calculate the Equilibrium level of Income.

Question

Accepted Answer

Given: Consumption Function: C = 100 + 0.8Y

(i) Marginal Propensity to Save (MPS):
MPS = 1 - MPC = 1 - 0.8 = 0.2

(ii) At equilibrium, Y = C + I
Given autonomous consumption = ₹100 crores, let autonomous investment = I₀
Y = 100 + 0.8Y + I₀
Y - 0.8Y = 100 + I₀
0.2Y = 100 + I₀
Y = (100 + I₀) / 0.2

If equilibrium income is given (e.g., Y = ₹2,000 crores):
2000 = (100 + I₀) / 0.2
400 = 100 + I₀
I₀ = ₹300 crores

The level of autonomous investment depends on the equilibrium income level.