Assuming the following for a hypothetical economy, estimate the level of Break-even Income and Equilibrium Income : (i) Autonomous Consumption Expenditure (c̄) = Rs. 50 crore (ii) Marginal Propensity to Save (MPS) = 0.2 (iii) Autonomous Investments (I_0) = Rs. 300 crore

Question

Accepted Answer

Given: Autonomous Consumption (c̄) = ₹50 crore, MPS = 0.4

Step 1: Calculate MPC
MPC = 1 - MPS = 1 - 0.4 = 0.6

Step 2: Break-even level of Income
At break-even, C = Y (saving is zero)
C = c̄ + bY
Y = 50 + 0.6Y
Y - 0.6Y = 50
0.4Y = 50
Y = 50 / 0.4
Y = ₹125 crore

Break-even Income = ₹125 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

If we assume I₀ is given (e.g., I₀ = ₹75 crore):
Y = 50 + 0.6Y + 75
Y = 125 + 0.6Y
0.4Y = 125
Y = ₹312.5 crore

The break-even income is ₹125 crore, and the equilibrium income depends on the autonomous investment value.