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Sample questions- Consumption function

The document presents a series of problems and solutions related to consumption functions in economics. It includes calculations for consumption expenditure, savings, and income levels based on given consumption functions and investment values. Key concepts such as marginal propensity to consume (MPC) and autonomous consumption are also discussed.

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2 views

Sample questions- Consumption function

The document presents a series of problems and solutions related to consumption functions in economics. It includes calculations for consumption expenditure, savings, and income levels based on given consumption functions and investment values. Key concepts such as marginal propensity to consume (MPC) and autonomous consumption are also discussed.

Uploaded by

megakiran
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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MEP- EMBA Term II

Sample questions: Consumption Function

Problem 1. Given consumption function C=100+0.75Y & Investment = 1000.

Calculate i) Consumption expenditure and ii) consumption expenditure at equilibrium level.

Solution:

C= 100+0.75Y
Saving= (Income- Consumption)
Saving= Y- (100+0.75Y) = 0.25Y-100
At equilibrium level of income, savings = investment
0.25Y-100 = 1000
Y = 4400

Consumption expenditure:
C= 100+0.75Y
C= 100+0.75*4400
C= 3400

Problem 2. Calculate consumption level if Y= Rs 1000 Cr and consumption function is C= 300+0.5Y

Solution:

C=100+0.5Y
C= 100+0.5*100
C= 800 Cr.

Problem 3. Find out income level when consumption is 1200 and consumption function is C=100+0.5Y

Solution:
1200 = 100+0.5Y
Y= 2200 Cr.

Problem 4. Using the equation of consumption function, calculate consumption expenditure at income
level of 500 Cr. If autonomous consumption is 40 Cr and 40% of the additional income is saved.

Solution:
C= a+b(Y)

Saving of additional income = 40%


MPS= 0.4
MPC= 1-0.4= 0.6
C= 40+0.6(500)
C= 340
Problem 5. Find consumption and saving when autonomous consumption is 40 Cr, MPC is 0.4 and
income is 1000 Cr.

Solution:

C= a+b(Y)
C= 40+0.4(1000)
C= 440

Y= C+S
1000= 440+S
S= 560

Problem 6. The breakeven level of income for an economy is given to be 10,000 Cr. If the economy
saves 20% of the additional income, calculate the value of autonomous consumption

Solution:

Breakeven level of income: Y=C (Zero Savings)


Y=C=10000

20% of the additional income was saved: MPS= 0.2


MPC = 1-MPS
MPC= 1-0.2 = 0.8

C= a+b(Y)
10000= a +0.8(10000)
a= 10000- 8000
a= 2000

Problem 6. The consumption function of an economy is C=40+0.8Y. Determine the level of income
where APC will be one.

Solution:

C= 40+0.8Y

APC= C/Y
If APC= 1
1= C/Y
Y=C

Y= 40+0.8Y
0.2Y= 40
Y= 200

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