question_answer

Given below is the consumption function of an economy. C = 100 + 0.5Y With the help of a numerical example, show that in this economy as income increases, Average Propensity to Consume (APC) will decrease. Also, find the equilibrium level of income, when investment expenditure isRs.400.

Answer:

C =100+0.5Y, Substituting the values of Y as 400, 500 and 600, we get the schedule as below:

Y	C	APC\[=\frac{C}{Y}\]
400	300	0.75
500	350	0.70
600	400	0.67

In the given schedule, we can observe that as income rises, APC declines from 0.75 to 0.67. Thus, as income is increasing, APC is decreasing.                                              It is given that, Investment Expenditure (I) =Rs.400, and consumption [C]=100+0.5 Y We know that, Income (Y)=C+I On substituting the value of C and I, we get             \[Y=100+0.5Y+400\Rightarrow Y-0.5Y=500\]              \[0.5Y+500\Rightarrow Y=\frac{500}{0.5}=1,000\] So, when investment is Rs.400, Income is Rs. 1,000.