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

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]