-Refer to Figure 11.2. Suppose that Ca = 40, MPC = 0.8, I = 10. What is the value of consumption in equilibrium?
A) 32
B) 80
C) 240
D) 320

Question

-Refer to Figure 11.2. Suppose that Ca = 40, MPC = 0.8, I = 10. What is the value of consumption in equilibrium?
A) 32 
B) 80 
C) 240 
D) 320

Quizplus · Accepted Answer

The equilibrium level of consumption can be found using the formula for aggregate expenditure (AE) in a simple economy: AE = C + I, where C is consumption and I is investment. Consumption (C) itself is determined by the formula C = Ca + MPC(Y - T), where Ca is autonomous consumption, MPC is the marginal propensity to consume, and (Y - T) represents disposable income. In equilibrium, AE equals output (Y), so we can set Y = AE to solve for equilibrium consumption. Given Ca = 40, MPC = 0.8, and I = 10, and assuming no taxes (T = 0) for simplicity, we first find the equilibrium output (Y) by solving the equation Y = Ca + MPC*Y + I. Rearranging terms, we get Y - MPC*Y = Ca + I, which simplifies to Y(1 - MPC) = Ca + I. Plugging in the given values, we get Y(1 - 0.8) = 40 + 10, which simplifies to Y*0.2 = 50, leading to Y = 250. Since consumption (C) is Ca + MPC*Y, we plug in the values to get C = 40 + 0.8*250 = 40 + 200 = 240.