Question

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

Answer 1

Rational Consumer Jim will consume at utility maximising Consumer Equilibrium product combination : 4 Units of Nuts , 8 Units of Apples .

Step-by-step 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]