Final answer:
The marginal propensity to consume (MPC) is found by dividing the change in consumption by the change in income, which in this case is $300/$500, leading to an MPC of 0.6, indicating that 60% of additional income is spent on consumption.
Step-by-step explanation:
Ignoring the taxes in this scenario, it's important to note the relationship between the marginal propensity to save (MPS) and the MPC.
Since the MPC + MPS equals 1, if the MPS is given as 0.1, then the MPC must be 0.9.
However, the introduction of taxes adjusts the after-tax income, which influences the MPC.
For example, in Table D2, taxes are calculated as a certain percentage of the income, which impacts the after-tax income, and thereby alters the calculated MPC when that is used to determine the consumption level.
The pattern of consumption without considering taxes can be seen in Table D1 where the calculation involves multiplying income by the MPC and adding a constant to account for baseline consumption even if income was zero.
Incorporating taxes into the model, as seen in other tables, the consumption function becomes flatter, reflecting a decreased MPC due to the effect of the tax rate on disposable income.
Thus, after-tax income directly influences the consumption pattern in an economy.