In an Economy, the value of multiplier is 4 times, and autonomous consumption is ₹30 crore. The relevant consumption function for this economy would be :
Answer & explanation
Correct answer: option 1
The correct answer is option (1) : C= 30 + 0.75 y
The relevant consumption function for this economy can be determined from the multiplier (k) and the autonomous consumption $(C_0$) using the formula : $k=\frac{1}{1-c}$
where c is the marginal propensity to consume.
Thus, $4=\frac{1}{1-c}$
4 (1 - c) = 1
c=3/4=.75
Thus, MPC (c)= 0.75
The consumption function is then :
$C=C_0+cY$
Substituting the values :
$C= 30+\frac{3}{4Y}$
Therefore, the relevant consumption function for this economy is :
$C= 30+0.75Y$