Question

If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from $200 to $300, her marginal propensity to:

1. save is three-fifths.
2. consume is one-half.
3. consume is four-fifths.
4. consume is one-fifths.

Answer 1

Option 3: consume is four-fifths.

Step-by-step explanation:

When Carol's disposable income was $1200 she saved $200

Therefore, (200/1200) x 100% = 16.6%

When it increased to %1700 savings also increased to %300,

So (300/1700) x 100 = 17.8%

Carol was able to save 16.6% to 17.8% which makes her marginal propensity to consume four-fifths.

This makes Option 3 the appropriate answer.

Answer 2

3. Marginal Propensity to Consume is four-fifths

Step-by-step explanation:

Step One: Check the Information Provided

Carol's Disposable Income = $1,200 increased to $1,700

Carol's Savings = $200 increased to $300

Since we are given information on Carol's income and savings, the first thing to do is calculate her Marginal Propensity to Save. If we were given Carol's consumption, we should have calcated the Marginal Propensity to Consume.

Step Two: Calculate the Marginal Propensity to Save and Check the Answers

Marginal Propensity to Save or MPS= Change in Savings÷ Change in Disposable income

Change in Savings= $300-$200 = $100

Change in Income= $1,700 - $1,200= $500

MPS= $100/$500 = One-fifths

Checking the answer, the Marginal Propensity to Save at One-fifths is not part of the options.

Step Three: Calculate thh Marginal Propensity to Consume from the Marginal Propensity to Save

The formula for Marginal Propensity to Consume can either be

Change in Consumption/Change in Income

or

1-Marginal Propensity to Save

Since we have the Marginal Propensity to save (MPS) then

Marginal Propensity to Consume or MPC = 1-1/5

=4/5 or four-fifths

This is option 3.