Consider a Consumption Function and Level of Disposable Income

Understanding a Consumption Function and Disposable Income

A consumption function refers to the relationship between consumption and disposable income. It shows how changes in disposable income affect the level of consumption in an economy. In this case, we are given a consumption function of the form C = 40 + 0.6Yd, where C represents consumption and Yd represents disposable income.

Now, let's consider a scenario where desired savings are zero. This means that individuals are not saving any portion of their disposable income and are consuming all of it. The question asks us to determine at what level of disposable income desired savings will be equal to zero.

Finding the Level of Disposable Income

To find the level of disposable income when desired savings are zero, we need to set the consumption function equal to disposable income and solve for Yd.

Given consumption function: C = 40 + 0.6Yd

When desired savings are zero, consumption (C) equals disposable income (Yd).

Setting C equal to Yd:

40 + 0.6Yd = Yd

Subtracting 0.6Yd from both sides:

40 = 0.4Yd

Dividing both sides by 0.4:

Yd = 40 / 0.4

Yd = 100

Therefore, the level of disposable income when desired savings are zero is $100.

Final Answer

The level of disposable income when desired savings are zero is $100.

Explanation: To find the level of disposable income when desired savings are zero, we need to set the consumption function equal to disposable income and solve for Yd. Given consumption function: C = 40 + 0.6Yd. When desired savings are zero, consumption (C) equals disposable income (Yd). Setting C equal to Yd: 40 + 0.6Yd = Yd. Subtracting 0.6Yd from both sides: 40 = 0.4Yd. Dividing both sides by 0.4: Yd = 40 / 0.4. Yd = 100. Therefore, the level of disposable income when desired savings are zero is $100.