Question

In a two-sector economy, if the consumption function is C = 10 + 0.8Y and planned investment is R15, the equilibrium expenditure is:


R50


R150


R125


R175

Answer 1

In a two-sector economy, the equilibrium expenditure occurs when total output (Y) equals total planned expenditure (E), which is the sum of consumption (C) and planned investment (I).

The consumption function provided is:
\[ C = 10 + 0.8Y \]

Planned investment (I) is given as R15.

The total planned expenditure (E) can be expressed as:
\[ E = C + I \]
\[ E = (10 + 0.8Y) + 15 \]
\[ E = 25 + 0.8Y \]

At equilibrium, we have:
\[ Y = E \]
\[ Y = 25 + 0.8Y \]

Now, we can solve for Y:
1. Rearrange the equation:
\[ Y - 0.8Y = 25 \]
\[ 0.2Y = 25 \]
2. Divide both sides by 0.2:
\[ Y = \frac{25}{0.2} \]
\[ Y = 125 \]

Therefore, the equilibrium expenditure (Y) in this economy is **R125**.

Thus, the correct answer is **R125**.