Assuming the following for a hypothetical economy, estimate the Break-even level of Income and Equilibrium level of Income : (i) Autonomous Consumption Expenditure (C̄) = Rs. 50 crore (ii) Marginal Propensity to Save (MPS) = 0.2 (iii) Autonomous Investments (I_0) = Rs. 100 crore

Question

Accepted Answer

Given: Autonomous Consumption (C̄) = ₹50 crore, MPS = 0.2

Step 1: Calculate MPC
MPC = 1 - MPS = 1 - 0.2 = 0.8

Step 2: Break-even level of Income
At break-even, C = Y (saving is zero)
C = c̄ + bY
Y = 50 + 0.8Y
Y - 0.8Y = 50
0.2Y = 50
Y = 50 / 0.2
Y = ₹250 crore

Break-even Income = ₹250 crore

Step 3: Equilibrium level of Income
At equilibrium, Y = C + I
We need autonomous investment (I₀). Using the consumption function:
Y = c̄ + bY + I₀
At break-even: Y = c̄ + bY (since I₀ = 0 at break-even for calculation purposes)

Alternatively, if we assume I₀ is given (e.g., I₀ = ₹100 crore):
Y = 50 + 0.8Y + 100
Y = 150 + 0.8Y
0.2Y = 150
Y = ₹750 crore

The break-even income is ₹250 crore, and the equilibrium income depends on the autonomous investment value.