Question

Given the following data: Income in Yr 1=$3000; Consumption in Yr 1=$2700 Income in Yr 2=$4000; Consumption in Yr. 2=$3600. Find MPS?

A) 0.1
B) 0.3
C) 0.5
D) 0.9

Answer 1

The marginal propensity to save (MPS) is 0.2. The Marginal Propensity to Save (MPS) is 0.1. (option 1)

Step-by-step explanation:

The Marginal Propensity to Save (MPS) measures the proportion of additional income that individuals choose to save rather than spend. In this context, it is calculated by dividing the change in savings by the change in income. The change in income (ΔY) between Year 1 and Year 2 is 4000 − 3000 = 1000 while the change in consumption (ΔC) is 3600−2700=900.

The difference between income and consumption represents savings (ΔS), which is 1000 − 900 = 100.

MPS = ΔS/ΔY = 100/1000 = 0.1

This implies that for every additional dollar of income, individuals save 10 cents. A MPS of 0.1 suggests a relatively low propensity to save and a higher inclination to consume. Economically, a low MPS can contribute to increased spending and economic growth, as individuals are more likely to inject additional income into the economy through consumption. Policymakers use MPS to design effective economic strategies, as understanding consumer behavior is fundamental to implementing measures that stimulate or stabilize the economy.

In this case, the calculated MPS of 0.1 reflects a modest savings behavior among individuals in response to changes in income.