Question

1. The consumption function is given by the equation: C = 400 + 0.8(Y_d) where C = consumption and Y_d = disposable income. Currently, the level of disposable income is $5000.
   1. What is the current level of consumption?
   2. What is the current level of saving?
   3. What is the MPC? What is the MPS?
   4. Calculate the APC and the APS.

6. We are given the following information about the levels of disposable income and savings:

Disposable Income	Consumption	Savings	APC	APS	MPC	MPS
$2400		$-80			---	---
2600		-40
2800		0
3000		40
3200		80
3400		120
3600		160
3800		200
4000		240

1. Complete the table.
2. What is the break-even level of income?

Answer 1

Q) C = 400 + 0.8(Y_d)

Y_d= $5000

a) C = 400 + 0.8(Y_d)

Putting the value of disposable income in the above equation,

C = 400 + 0.8(5000)

= 400 + 4000

= $4400 is the answer.

So, the current level of consumption is $4400.

b) Savings = Disposable income - Consumption

= 5000 - 4400

= $600 is the answer.

So, the current level of savings is $600.

c) C = 400 + 0.8(Y_d)

MPC is calculated by differentiating the consumption function with respect to disposable income as it measures the change in consumption due to a given change in income.

So, differentiating the consumption function with respect to disposable income,

MPC = dC / dY_d = C / Y_d = 0.8 is the answer.

MPC + MPS = 1

0.8 + MPS = 1

MPS = 1 - 0.8 = 0.2 is the answer.

d) APC = consumption / disposable income

= 4400 / 5000

= 0.88 is the answer.

APC + APS = 1

0.88 + APS = 1

APS = 1 - 0.88 = 0.12 is the answer.