Question

Suppose that Bob earns $20,000 a year and that Jimena earns $200,000 a year and that both earned a 10% increase in their disposable income. Who do you think is likely to have the higher MPC? Explain your reasoning

Answer 1

Bob is likely to have the higher MPC (marginal propensity to consume). This is because Bob earns a much lower income than Jimena, so any increase in his disposable income is likely to have a bigger effect on his spending than it would on Jimena's. As Bob earns a lower income, the increase in his disposable income is likely to be a larger percentage of his total income, and therefore he is more likely to use the extra money to increase his consumption. This means that Bob is likely to have the higher MPC.