Question

if consumption (c) equals $32,000 when disposable income (di) equals $40,000. if c increases to $38,000 when di increases to $50,000, what is the marginal propensity to consume (mpc)? what is the marginal propensity to save (mps)?

Answer 1

The marginal propensity to consume (MPC) is 0.6, calculated by dividing the change in consumption by the change in disposable income. The marginal propensity to save (MPS) is 0.4, derived from subtracting MPC from 1. The sum of MPC and MPS always equals 1, reflecting the consumption function.

Step-by-step explanation:

The marginal propensity to consume (MPC) is the fraction of any change in disposable income that is consumed. In this scenario, when disposable income (DI) increases from $40,000 to $50,000, an increase of $10,000, consumption (C) rises from $32,000 to $38,000, an increase of $6,000.

The MPC is calculated by dividing the change in consumption by the change in disposable income, so MPC = $6,000 / $10,000 = 0.6.

Next, the marginal propensity to save (MPS) is the fraction of any change in disposable income that is saved.

Since MPS + MPC must always equal 1, we can calculate MPS as 1 - MPC.

Therefore, MPS = 1 - 0.6 = 0.4.

It is important to note that the total amount of consumption and saving must always add up to the total amount of disposable income, and this relationship is referred to as the consumption function.