Question

The consumption function in an imaginary economy is known to be C = 100 + 0.75Y. The level of equilibrium income in this economy is 800 crores. What will be the value of investment in this economy?

• A. 200 crores
• B. 100 crores
• C. 400 crores
• D. 300 crores

Answer 1

The Correct Option is B

The given consumption function is C = 100 + 0.75Y. Here, C represents consumption and Y represents income. We know that at equilibrium, income (Y) equals consumption (C) plus investment (I). Therefore, we have: 

Y = C + I

Given Y = 800 crores and replacing C with the consumption function, we get:

800 = 100 + 0.75(800) + I

Calculate 0.75 times 800:

0.75 × 800 = 600

Substitute back into the equation:

800 = 100 + 600 + I

Simplify:

800 = 700 + I

Subtract 700 from both sides to solve for I:

I = 800 - 700

I = 100

Therefore, the value of investment in this economy is 100 crores.

Answer 2

Using the equilibrium condition, the level of investment can be calculated. In economics, the equilibrium condition typically refers to the point where total investment equals total savings in an economy. This balance ensures that there is no unintended accumulation of inventory, and the economy is operating efficiently.

In this case, the investment is calculated to be 100 crores. This means that, based on the equilibrium condition, the total amount of funds allocated for investment purposes in the economy is 100 crores. Investment plays a crucial role in driving economic growth, as it leads to increased production, employment, and overall economic activity.

It’s important to note that this level of investment is considered sufficient to maintain the economy's current growth trajectory while ensuring that it is balanced with the savings generated within the economy.