Deriving the Consumption Function Given MPC and Zero-Level Income Consumption

To derive the consumption function, we need to understand the relationship between income and consumption. This relationship can be expressed as follows:

C = a + bY

where C is consumption, Y is income, a is autonomous consumption (consumption at zero income level), and b is the marginal propensity to consume (MPC).

Given that MPC is four times MPS (marginal propensity to save), we can express b as follows:

b = 4/5

To find the value of a, we are given that consumption at zero level of income is ₹70 crores. Therefore, we can express a as follows:

a = 70

Therefore, the consumption function can be expressed as follows:

C = 70 + (4/5)Y

This equation shows us that consumption increases as income increases. The marginal propensity to consume tells us that for every ₹1 increase in income, consumption will increase by ₹0.80 (4/5 of ₹1). The autonomous consumption term (70) tells us that even at zero income level, there is still some consumption happening due to other factors such as government transfers, savings, etc.

Conclusion

In conclusion, the consumption function can be derived by understanding the relationship between income and consumption. Given MPC and autonomous consumption, we can express the consumption function as a linear equation. This equation helps us understand how changes in income affect consumption and can be used to make predictions about consumer behavior.