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Question : 15
Total: 18
Given Consumption curve, derive saving curve and state the steps taken in the process of derivation. Use diagram.
Solution:
Consumption + saving is always equal to income because income is either consumed or saved. It implies that consumption and saving curves representing consumption and saving functions are complementary curves.
In partA , CC curve shows consumption function whereas 45 ∘ line represents income. C curve intersects 45 ∘ line at point B at which B R = O R i.e.,.consumption = income. Point B is the break even point showing zero saving. It states that saving curve must intersect X -axis at the same income level where consumption curve and 45 ∘ line intersects. Left of point B is negative saving and to the right of point B is positive saving.
In partB , we derive saving function in the form of saving curve. In part A , the amount of saving is the vertical distance between C curve and 45 ∘ line. By plotting, the vertical distances of saving/dissaving and by joining them, we derive a saving curve. In part A the vertical distance O C (dissaving) is plotted as OS 1 below X -axis in part-B. At OR level of income in Part A, vertical distance at point B is shown as point B 1 on X -axis in lower part of figure is nil. LM of part A is shown as L 1 M 1 in part-B. By joining points S , B 1 and L 1 in lower segment, we get saving curve. Thus saving curve is derived from consumption curve.
In part
In part
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