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 income point is reached when total income equals total expenditure. Total expenditure comprises autonomous consumption and investment expenditure.
The formula for calculating the break-even income is: \[ \text{Break-even income} = \frac{C_0 + I}{1 - MPC} \] For Economy A, with MPC = 0.8, \(C_0 = 400\) crore, and \(I = 2000\) crore, the calculation is: \[ \text{Break-even income} = \frac{400 + 2000}{1 - 0.8} = \frac{2400}{0.2} = 12,000 \text{ crore} \] Therefore, Economy A's break-even income is ₹12,000 crore.