-->

Determination Of Income And Employment

Question

In an economy consumption function is given as C = 100 + 0.5 Y. With the help of a numerical example show that as income increases, APC will decrease.

Solution

Suppose income (Y) rises from र 400 to 500 and then from 500 to 600.
When income is 400, C = 100 + 0.5 x 400 = 300 then

APC space equals space straight C over straight Y space equals 300 over 400 space equals space 0.75

When income is 500, C = 100 + 0.5 x 500 = 350 then

APC space equals space 350 over 500 space equals space 0.70

When income is 600,

straight C space equals space 100 space plus space 0.5 space cross times space 600 space equals space 400

then

APC space equals space 400 over 600 space equals space 0.67

Clearly when income increases from र 400 to 600, APC declines from 0.75 to 0.67.