What does this function denote C= 750 + 0.6Y?
Answer & explanation
Correct answer: option 2
The correct answer is option 2: At, 0 level of income a person will consume Rs 750 worth of goods. With 1 Re increase in income consumption will increase by 60 paise.
Equation of consumption function is written as:
C= c + bY
Where, C = Total consumption, c = autonomous consumption, b = MPC and Y= change in Income
Here's a breakdown of the consumption function C = 750 + 0.
Here's a breakdown of the consumption function C = 750 + 0.6Y:
750: This is the autonomous consumption, which represents the level of consumption that occurs even when income is zero. In other words, a person will consume Rs 750 worth of goods regardless of their income level.
0.6Y: This is the marginal propensity to consume (MPC), which represents the fraction of each additional rupee of income that is spent on consumption. In this case, for every Rs 1 increase in income, the person will consume 60 paise (0.6 * 1).
Therefore, the function indicates that a person will consume Rs 750 worth of goods even at zero income, and their consumption will increase by 60 paise for every Rs 1 increase in income.