Given the consumption function C=a+ bY (with a>@;g0, Show that this consumption function is inelastic at all positive income levels.

ENGR.ECONOMIC ANALYSIS
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ISBN:9780190931919
Author:NEWNAN
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Chapter1: Making Economics Decisions
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Given the consumption function C=a + bY (with a>Ø;Ø<b<):
(a) Find its
marginal function = b
marginal function and its average functi on.
atby
averagetuncction=
Find the income elasticity of consumption ECY,and determine
its sign, assuming Y>0,
Show that this consumption function is inelastic at all
positive income levels.
Transcribed Image Text:Given the consumption function C=a + bY (with a>Ø;Ø<b<): (a) Find its marginal function = b marginal function and its average functi on. atby averagetuncction= Find the income elasticity of consumption ECY,and determine its sign, assuming Y>0, Show that this consumption function is inelastic at all positive income levels.
Expert Solution
Step 1

Cosuption function 

C =a+bY    ................. (1) 

where a>0 and 0<b<1

The marginal function of consumption function:

differentiating eq 1 w r t Y

    dCdY = 0+b(1)dCdY=b 

Average function:

Dividing eq 1 by Y

CY= aY+b

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