Question

If the MPC is 0.8 and disposable income is $200, then:

a. Saving will be $20
b. Personal consumption expenditures will be $80
c. Consumption and saving cannot be determined from the information given
d. Saving will be $40

Answer 1

The correct answer is that savings will be $40 when the MPC is 0.8 and disposable income is $200, as 20% of the income will be saved while 80% will be spent on consumption.

Step-by-step explanation:

If the Marginal Propensity to Consume (MPC) is 0.8 and disposable income is $200, then we can calculate how much of that income will be spent on consumption and how much will be saved. The definition of MPC is the proportion of additional income that an individual is likely to consume rather than save. Therefore, if the MPC is 0.8, the marginal propensity to save (MPS) is 1 - MPC, which is 0.2. This means that 80% of any additional income will be consumed, and 20% will be saved.

With a disposable income of $200, personal consumption expenditures will be 0.8 * $200 = $160. Saving, on the other hand, will be 0.2 * $200 = $40.

Thus, the correct answer to the student's question is that saving will be $40, making option d the correct choice.