Question

On the basis of given diagram, answer the following questions:
(i) What is the value of autonomous consumption ?
What is the break-even level of income or at what level of income saving is zero ?
(iii) How much is APC corresponding to point E ?
(iv) If MPC = 0.6, determine the consumption and saving function.

Answer 1

(i) Consumption curve makes an itercept of ₹ 40 crores on the Y-axis. So, Autonomous Consumption (`barc`) = ₹ 40 crores.
(ii) Break-even point occurs when Consumption = Income (or Saving = 0)
So, Break-even level of income = ₹ 100 crores.
(iii) At point E, C = Y = ₹ 100 crores. So, APC = `("Consumption(C)")/("Income(Y)")=(100)/(100)` = 1
Consumption Function is given as: C= `barc` +b(Y)
Autonomous Consumption (`barc`) = ₹ 40 crores and b or MPC = 0.6
Putting value of b and (`barc`) in consumption function, we get: C= 40+0.6Y
Saving Function in given as: S= -`barc`+(1-b)Y
(1-b) or MPS = 1-MPC=1-0.6=0.4
Putting values of (1-b) or MPS and -(`barc`), we get: S=-40+0.4Y