5 marks

MATHEMATICAL ECONOMICS II (ECO607)

ASSIGNMENT 02

THE CASE:
Suppose that a country is based on just two sectors i.e. consumption (C) and investment (I). The
marginal propensity of consumption is such that 80 per cent of the national income (Y) is
consumed with the increase in income while autonomous consumption is 300 million dollars.
The investment is just 900 million dollars while there is no induced investment in the economy.
Considering this information for the two-sector economy; we have following structural
equations:
dY
= 0.5 ( C + I – Y )
dt
C = 0.8Y + 300
I = 900

Requirement:
a. State whether the national income equation is homogenous?
b. Find the time-path of national income of the economy; Y (0) = 9000 million dollars.

ANSWER:
DATA:
Marginal prospensity to consume = 80 % = 0.8
Autonomous consumption = 300 million dollars
Investment = 900 million dollars
Consumption = C = 0.8 Y + 300
SOLUTION:
The national income equation is
National income = consumption + investment
Y=C+I
Let’s substitute values
Y = (0.8 Y + 300) + 900
Y = 0.8 Y + 1200
Y – 0.8 Y = 1200
0.2Y = 1200
1200
Y=
0.2
Y = 6000

So the equation simplifies to Y = 6000, which is a function of Y.

Therefore, we can say that the national income equation Y = 1200 + 0.8 Y is homogeneous.

dY
b. Given the equation for rate of national income = 0.5 ( C + I – Y ); we can substitute
dt
equations of C and I.
dY
= 0.5 ( C + I – Y )
dt
dY
= 0.5 ( 0.8Y + 300+ 900 – Y )
dt
dY
= 0.5 ( 0.8Y + 1200 – Y )
dt
dY
= 0.5 ( 0.8Y– Y + 1200)
dt
dY
= 0.5 (-0.2Y + 1200)
dt
dY
= - 0.1Y + 600
dt
 dY
+ 0.1 Y = 600
dt
First Order Differential Equation for National Income.
dY
+ 0.1Y = 600
dt
Here a = 0.1, b = 600, Y(0) = 9000
Choice of Case of the differential Equation:
As 𝒃 = 𝟓𝟎𝟎, so 𝒃 ≠ 𝟎: Non-Homogenous Case.
As 𝒂 = 𝟎. 𝟏, so 𝒂 ≠ 𝟎: Non-Homogenous Case with 𝒂 ≠ 𝟎.
Therefore, using the definite Solution of time-path of 𝑵𝑯𝑪𝒂≠𝟎:
b b
(𝒕) = {𝒚(𝟎) − } 𝒆 –at +
a a
Substituting values of y, a, b, and y(0) respectively:
600 600
(𝒕) = {9000 – } 𝒆 –0.1t +
0.1 0.1
(𝒕) = {9000 − 6000 } 𝒆 –0.1t + 6000
(𝒕) = {3000 } 𝒆 –0.1t + 6000
It is the definite Time-path of National Income of the economy.
(𝒕) = {3000 } 𝒆 –0.1t + 6000
Here Yc = {3000 } 𝒆 –0.1t and Yp = 6000