Question

Answer the following questions based on the figure given below:

1. At which level of income will Average Propensity to Save (APS) be equal to zero & why?
2. What does ‘OA’ signify with respect to the consumption function?

Answer 1

(i) S = −50 + 0.2 Y

For the APS to be equal to 0, Savings has be 0.

0 = −50 + 0.2 Y

0.2 Y = 50

Y = 50 ÷ 0.2

= ₹ 250 crores

Thus, APS will be zero when income equals ₹ 250 crores.

(ii) The significance of OA with respect to the consumption function is:

1. Consumption is higher than income, but it gradually decreases and becomes equal to income as we move from point A to point O.
2. Point O represents the situation where consumption is equal to income.
3. Point A shows that consumption exceeds income, resulting in dissaving.