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

Given the consumption function C = 100 + 0.75Y, where C is consumption and Y is income. At equilibrium, income (Y) equals consumption (C) plus investment (I), so:

Y = C + I

With Y = 800 crores and substituting the consumption function:

800 = 100 + 0.75(800) + I

Calculating 0.75 multiplied by 800:

0.75 × 800 = 600

Substituting this back into the equation:

800 = 100 + 600 + I

Simplifying the equation:

800 = 700 + I

Solving for I by subtracting 700 from both sides:

I = 800 - 700

I = 100

The investment in this economy is 100 crores.