Question

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1. The data below pertain to a hypothetical private economy. Disposable Income (Y) Consumption (C) $ 0 $ 60 100 130 200 200 300 270 400 340 Use the above data to answer the questions below: 1. Write the linear equation representing the economy's consumption schedule. Clearly show your steps and calculations. 2. With your equation in (1), calculate the economy's consumption at $385 level of disposable income. Clearly show your steps and calculations. 3. Estimate the economy's average propensity to save at $400 level of disposable income. Clearly show your steps and calculations. 4. Interpret your estimate of the economy's average propensity to save in (3) above. 5. Determine the economy's break-even income. Justify your answer.

Answer 1

1. From the table it is seen that wheny Y = $0, C = $60. so, autonomous consumption is $60.

MPC = ∆C / ∆Y = 70 / 100 = 0.7

Thus, the consumption equation is:

C = 60 + 0.7Y

2. If Y = $385

C = 60 + 0.7(385) = $329.5

Thus, the economy's consumption is $329.5.

3. T Y = $400, C = $340. So, S = Y - C = 400 - 340 = $60

APS = S / Y = 60 / 400 = 0.15

4. Since APS is 0.15, it means 15% of disposable income is saved.

5. To calculate the break even income, we have to equate

Y = C

Y = 60 + 0.7Y

Y - 0.7Y = 60

0.30Y = 60

Y = 60 / 0.3 = $200

So, the breakeven income is $200.