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Consumption And Investment In Management

 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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