Question

If consumption, C, equals (4/5)*(Y-T) + 200 and if taxes, T, equal (1/4)*Y, then the marginal propensity to consume, MPC, equals _____ and the marginal propensity to consume out of income Y, MPCy, equals _____.

Answer 1

The MPC is 0.8, given by the coefficient in the consumption function. The MPCy is 0.6, which is the MPC multiplied by the portion of income left after taxes (1-T), with T being a quarter of the income.

Step-by-step explanation:

The marginal propensity to consume (MPC) is the change in consumption when disposable income changes by one unit. Given the consumption function C = (4/5)*(Y-T) + 200 and taxes T = (1/4)*Y, we can calculate the MPC as the coefficient of the disposable income in the consumption function, which here is 4/5 or 0.8.

The marginal propensity to consume out of income Y, MPCy, can be found by considering the fact that only a portion of the income (1-T) will be available for consumption. Given that T = (1/4)*Y, the available income after taxes is (3/4)*Y. Therefore, the MPC out of income Y is 0.8 * (3/4) = 0.6.