The consumption function of the economy is as C = 50 + 0.8 Y. Calculate change in income if the economy makes an additional investment of ₹80 crores.

₹400 crores

The correct answer is option (4) : ₹400 crores

Given the consumption function: C=50+0.8YC

The marginal propensity to consume (MPC) is 0.8. T

he investment multiplier (k) is given by the formula: 1/ (1-MPC)

Plugging in the value of MPC:

k=1/ (1-0.8)

k= 1/0.2

k =5

The change in income (ΔY) is calculated by multiplying the multiplier (k) with the additional investment (ΔI):

ΔY=k×ΔI

ΔY= 5*80

     = 400 crores