Question

Given the following data: Income in Yr 1=$4000; Consumption in Yr 1=$3200 Income in Yr 2= $3600; Consumption in Yr 2=$2900. Find MPC?

A) 0.25
B) 0.75
C) 0.8
D) -0.25

Answer 1

The marginal propensity to consume (MPC) is calculated based on the changes in income and consumption provided. It's found to be 0.75, indicating that when income increases by $1, consumption increases by 75 cents.

Step-by-step explanation:

To find the marginal propensity to consume (MPC), we consider the change in consumption relative to the change in income. From the provided data, the consumption in Yr 1 is $3200 when the income is $4000, and the consumption in Yr 2 is $2900 when the income is $3600. The change in consumption is $3200 - $2900 = $300, and the change in income is $4000 - $3600 = $400.

Therefore, the MPC can be calculated as the change in consumption divided by the change in income, which is $300 / $400 = 0.75. This demonstrates that when income increases by $1, the consumption rises by 75 cents. The given assumption about autonomous consumption is that there would be $600 of consumption even if income were zero. Combining this with the fact that the marginal propensity to save (MPS) is the remainder when MPC is subtracted from 1, thus MPS will be 0.25 if MPC is 0.75.