    # Consumption And Investment In Management Illustration 125

Provided the information below, you are required to determine the average and marginal propensity to consume.

 Earnings Y Value in Million \$ Consumption C Value in Million \$ 1700 1820 1850 1900 2220 1850 2760 2150 2590 2750 2920 2450 3540 2770

Solution

 Earnings Y Value in Million \$ Consumption C Value in Million \$ Average Propensity to Consume APC Marginal Propensity to Consume MPC C / Y Δ C / Δ Y 1700 1820 1820 / 1700 = 1.07 - 1850 1900 1900 / 1850 = 1.03 80 / 150 = 0.53 2220 1850 1850 / 2220 = 0.83 -50 / 370 = -0.14 2760 2150 2150 / 2760 = 0.78 300 / 540 = 0.56 2590 2750 2750 / 2590 = 1.06 600 / -170 = -3.53 2920 2450 2450 / 2920 = 0.84 -300 / 330 = -0.91 3540 2770 2770 / 3540 = 0.78 320 / 620 = 0.52

Illustration 126

Provided the saving function S = - 60 + 0.6Y and self-governed investment, I = \$300 million. You are required to find out the following

1. The Symmetry level of earnings
2. The level of consumption
3. If investment enhances permanently by \$30 millions, what will be the new levels of earnings and consumption

Solution

As per saving investment approach, symmetry level of national earnings is found out by balancing saving and investment and hence

S          =          I
Hence,
- 60 + 0.6Y      =          300

0.6Y    =          240

Y         =          240 / 0.6

(i)         Hence symmetry of Earnings (Y)                =          400

As per consumption function, Consumption parities earnings over savings and hence

C         =          Y – S                           …..Equation (2)
Hence,
S          =          - 60 + 0.6Y                  …..Equation (1)

Substituting the value of Y in the Equation (1), we procure the following

S          =          - 60 + 0.6 (400)

=          - 60 + 240

Hence Saving (S)                               =          180

Substituting the value of S and I in the Equation (2), we have the following

C         =          400 – 180

(ii)        Hence the level of consumption (C)             =          220

With the increase in investment by \$30 millions, the new investment parities to \$330 millions

S          =          I
Hence,

- 60 + 0.6 Y     =          330

0.6 Y   =          330 + 60

Y         =          390 / 0.6

(iii)       Hence, the new level of earnings would be (Y)       =          \$650 millions

Now, Saving                                       =          - 60 + 0.6 Y

=          - 60 + 0.6 (650)

=          - 60 + 390

Hence Saving (S)                                =          330

Substituting the new values of S and Y, the new consumption (C) would be devised as below

C         =          Y - S

=          650 – 330

(iii)       Hence, the new level of consumption would be (C) \$320 millions.

Illustration 127

Provided the data below, Earnings and Consumption based on which you are necessary to ascertain the following

1. Average Propensity to Consume
2. Average Propensity to Save
3. Marginal Propensity to Consume and
4. Marginal Propensity to Save
 Earnings Y Value in Million \$ Consumption C Value in Million \$ 360 360 480 460 600 560 720 660 840 760 960 860

Solution

 Earnings Y Value in Million \$ Consumption C Value in Million \$ Average Propensity to Consume APC Average Propensity to Save APS Marginal Propensity to Consume MPC Marginal Propensity to Save MPS APC = C / Y APS = S / Y (1 – APC) MPC = Δ C / Δ Y MPS = Δ S / Δ Y (1 - MPC) 360 360 360 / 360 = 1 or 100% 0 - - 480 460 460 / 480 = 0.96 0r 96% 0.04 100 / 120 = 0.83 0.17 600 560 560 / 600 = 0.93 or 93% 0.07 100 / 120 = 0.83 0.17 720 660 660 / 720 = 0.92 or 92% 0.08 100 / 120 = 0.83 0.17 840 760 760 / 840 = 0.91 or 91% 0.09 100 / 120 = 0.83 0.17 960 860 860 / 960 = 0.89 or 89% 0.11 100 / 120 = 0.83 0.17

Illustration 128

In an economy, the basic equations are as follows:

The consumption function is C           =          220 + 0.5Y and

Investment function is Ī                      =          250

You are required to ascertain the following

1. Symmetry level of earnings
2. Symmetry level of consumption
3. Symmetry level of saving
4. Symmetry level, aggregate demand equals aggregate supply and saving leakages equals investment injections

Solution

The symmetry condition is given as Y            =          C + I

Thus,
Y                     =          220 + 0.5Y + 250

Y – 0.5 Y         =          470

Y (1 – 0.5)      =          470

0.5Y                =          470

Y                     =          470 / 0.5

(a)        Hence, the symmetry level of earnings (Y)  =          940

The consumption function is C = 220 + 0.5Y

When Y = 940,
C         =          220 + 0.5 (940)

C         =          220 + 470

(b)       Hence, the symmetry level of consumption (C)      =          690

The saving equation is             S          =          Y – C

When Y = 940 and C = 690, we have

S          =          940 – 690

(c)        Hence, the symmetry level of saving (S)                  =          250

(d) Now the aggregate demand and aggregate supply has to be equal for symmetry level which parities saving leakages and investment injections.

Hence,
C + I    =          C + S

690 + 250                    =          690 + 250

940      =          940

(Or) Saving equals investment            S          =          I

250      =          250

Illustration 129

Let us assume the consumption function is C = Ca + b Y and investment is I = Ī, then

1. Determine the equation for the symmetry level of productivity
2. Determine the symmetry level of productivity when Ca = 250, b = 0.6 and Ī = 450

Solution

The symmetry condition is given as Y = C + I.

Y         =          Ca + b Y + Ī

Y – b Y           =          Ca + Ī

Y (1 – b)          =          Ca + I

(a)                    Y         =         Ca + Ī                         ……..Derivative (1)
(1 – b)

Substituting the values in the Derivative (1), we obtain the following

Y         =          250 + 450
1     -   0.6

Y         =          700 / 0.4

(b)       Hence, the symmetry productivity level is 1,750

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