Final answer:
The statement is true; the marginal propensity to consume (MPC) is indeed the change in consumption divided by the change in disposable personal income. This ratio, combined with the marginal propensity to save (MPS), which both add up to 1, illustrates how people allocate additional income between consumption and savings.
Step-by-step explanation:
The statement that the marginal propensity to consume (MPC) is the change in consumption divided by the change in disposable personal income is true. When individuals receive additional income, they decide how much of it to consume or save. The MPC represents the fraction of extra income allocated to consumption, while the marginal propensity to save (MPS) is the fraction saved. The sum of MPC and MPS always equals 1, signifying that all additional income is either consumed or saved.
Understanding MPC and MPS
An example to illustrate this concept would be if the MPC is 0.8, meaning that out of every additional dollar of income, 80 cents are spent on consumption. The remaining 20 cents would then represent the MPS, which in this case would be 0.2, ensuring the equation MPC + MPS = 1 remains true.
As disposable income increases, consumption likewise increases, but the increase in consumption is less than the increase in income, which indicates that the MPC is less than 1. This is because people tend to save a part of their additional income, leading to a fall in the average propensity to consume over time.