Question

In an economy; \( C = 200 + 0.75Y \) (where \( C \) is consumption expenditure and \( Y \) is National Income). Investment expenditure is ₹ 4,000 crore. Calculate the following:
(i) Equilibrium level of income.
(ii) Total consumption expenditure at equilibrium income level.

Hint:

Use the condition \( Y = C + I \) to find equilibrium income in two-sector models. Plug the equilibrium income back into the consumption function to find total consumption.

Answer 1

Given: Consumption function: \( C = 200 + 0.75Y \) Investment (I) = ₹ 4,000 crore Step 1: Find Equilibrium Income At equilibrium, \[ Y = C + I = (200 + 0.75Y) + 4000 \] \[ Y = 200 + 0.75Y + 4000 = 4200 + 0.75Y \] \[ Y - 0.75Y = 4200 \Rightarrow 0.25Y = 4200 \] \[ \Rightarrow Y = \frac{4200}{0.25} = ₹ 16,800 \, \text{crore} \] Step 2: Total Consumption at Equilibrium Income \[ C = 200 + 0.75 \times 16800 = 200 + 12600 = ₹ 12,800 \, \text{crore} \] Therefore, equilibrium income = ₹ 16,800 crore and total consumption = ₹ 12,800 crore.