Question

When consumption function intersects on the y-axis, then it indicates that

• A. Consumption is zero when income is zero
• B. Saving is negative when income is positive
• C. Consumption is positive when income is zero
• D. Saving is positive when income is zero

Hint:

The point where the consumption function intersects the y-axis indicates autonomous consumption, which occurs even without income.

Answer 1

The Correct Option is C

Step 1: Understanding the Consumption Function:
The consumption function shows the relationship between consumption and income. The consumption function can be expressed as: \[ C = a + bY \] Where \(C\) is consumption, \(a\) is autonomous consumption (consumption when income is zero), \(b\) is the marginal propensity to consume (MPC), and \(Y\) is income.
Step 2: Interpreting the Y-Axis Intersection:
When the consumption function intersects the y-axis (where income \(Y = 0\)), it represents autonomous consumption, i.e., consumption that occurs even when there is no income. This indicates that consumption is positive even when income is zero, typically financed through savings or borrowing.
Step 3: Conclusion:
Thus, when the consumption function intersects the y-axis, it indicates that consumption is positive even when income is zero, making option (C) the correct answer.