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Suppose the consumption function is c = 127-0.79 yd. if disposable income is $400, consumption is:

a. $487
b. $213
c. $68
d. $317

User LogicStuff
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1 Answer

4 votes

Final answer:

To calculate consumption, multiply the income level by 0.8, for the marginal propensity to consume, and add $600, for the amount that would be consumed even if income was zero. In this case, with a disposable income of $400, the consumption would be approximately zero.

Step-by-step explanation:

To calculate consumption, multiply the income level by 0.8, for the marginal propensity to consume, and add $600, for the amount that would be consumed even if income was zero. Consumption plus savings must be equal to income. In this case, the disposable income is $400. Plugging in this value in the consumption function, we have: c = 127 - 0.79 yd, where c is the consumption and yd is the disposable income. Substituting yd = $400, we get: c = 127 - 0.79 * 400 = 127 - 316 = -189

The consumption cannot be negative, so we consider it to be zero. Therefore, the correct option would be a. $487 as it is the closest positive value to zero.

User SnareHanger
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