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9 September, 23:53

Suppose you are given the following information for an economy without government spending, exports, or imports. C is desired consumption, I is desired investment, and Y is income. C and I are given by:

C

=

1300

+

0.85

Y

, and

I

=

450

.

a) What is the equation for the aggregate expenditure (AE) function?

b) Applying the equilibrium condition that Y = AE, determine the level of equilibrium national income.

c) Using your answer from part (b), determine the values of consumption, saving, and investment when the economy is in equilibrium

+1
Answers (1)
  1. 10 September, 00:09
    0
    Rational Consumer Jim will consume at utility maximising Consumer Equilibrium product combination : 4 Units of Nuts, 8 Units of Apples.

    Explanation:

    Consumer is at equilibrium where : Budget Line is tangent to Indifference Curve & hence their slopes are equal i. e MRS (NA) = P (N) / P (A)

    As per qstn given details : A / N = 10 / 5 implying A/N = 2 i. e A = 2N

    Putting this in Budget Constraint: Price of goods x Quantity of goods = Income

    [P (A) x Q (A) ] + [P (N) x Q (N) ] = Y

    10A + 5N = 100

    10 (2N) + 5N = 100 [Since A = 2N]

    20N + 5N = 100

    25N = 100

    N = 4; A = 8 [Since A = 2N]
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