Question

The consumption function of the income-expenditure model, where C = 10(0.8)Yd, C is consumption, and Yd is disposable income (Y - T), I = 5. Fill in the following blanks:

a) The marginal propensity to consume (MPC) is _____.
b) The autonomous consumption (C0) is _____.

Answer 1

The correct option is B). The marginal propensity to consume (MPC) is 0.8, indicating that 80% of any additional disposable income goes to consumption. The autonomous consumption (C0) is 10, representing the amount of consumption when income is zero.

Step-by-step explanation:

The consumption function provided in the question is C = 10(0.8)Yd, where C represents consumption and Yd represents disposable income. Analyzing this equation, we can determine the following:

1. The marginal propensity to consume (MPC) is the coefficient of Yd, which in this case is 0.8. This means that 80% of any additional disposable income is used for consumption.
2. Autonomous consumption (C0) is the constant term in the consumption function, representing the amount consumed when income is zero. In this function, it is 10.

Therefore, a) The MPC is 0.8, and b) The autonomous consumption (C0) is 10.