On the basis of consumption function: C = 120 + 0.40 Y, answer the following questions:
(i) Derive the saving function.
(ii) Determine the saving at the income level of ₹ 500 crores.
(iii) At what level of income, saving becomes zero ?

Explanation

(i) We know, Consumption function is expressed as: C= `barc` + b(Y)
It means: 120 is the autonomous consumption (`barc`) and 0.40 indicates MPC or b
Saving Function is given as: S = - `barc` + (1+b)Y
MPS or (1-b) = 1 - MPC = 1 -0.40 = 0.60
Putting the values of (1-b) or MPS and - `barc`, we get : S = -120+0.60(Y)
(ii) For saving at income (Y) of ₹ 500 crores, putting the values of (1-b), `barc` and Y in the saving function, we get : S= -120 + 0.60 `xx` 500 = ₹ 180 crores
(iii) Saving will become zero at break- even poit, i.e. when Y=C.
Replacing C with Y in the consumption function to determine the break-even point.
Y = 120 + 0.40 Y
0.6 Y = 120
Y = 200
Saving will become zero at income level of ₹ 200 crores