Question

Suppose for two imaginary economies A and B, the value of Marginal Propensity to Consume (MPC) stands at 0.8 and 0.6 respectively. For both the economies, Autonomous Consumption (Ĉ) = ₹ 400 crore and Investment Expenditure (I) = ₹ 2,000 crore.
Calculate the following :
(a) Break-even level of income for Economy A.
(b) Equilibrium level of income for Economy B.

Hint:

The break-even income occurs when consumption and investment expenditure equal total income. It’s calculated using the formula \(\frac{C_0 + I}{1 - MPC}\).

Answer 1

The Break-even level of income occurs when total income is equal to total expenditure. In this case, total expenditure is the sum of autonomous consumption and investment expenditure.
The formula for the break-even level of income is: \[ \text{Break-even income} = \frac{C_0 + I}{1 - MPC} \] Substituting the given values for Economy A (MPC = 0.8, \(C_0 = 400\) crore, \(I = 2000\) crore): \[ \text{Break-even income} = \frac{400 + 2000}{1 - 0.8} = \frac{2400}{0.2} = 12,000 \text{ crore} \] Thus, the break-even income for Economy A is ₹12,000 crore.