Question

Consider the consumption function of the country impala: country impala: c = 2 500 + 0.6YD which one of the following statements concerning the consumption function is incorrect?

a. if autonomous consumption increases, the marginal propensity will not be affected.
b. the value of autonomous consumption is equal to 2 500.
c. assume that the level of disposable income increases from r5 000 to r6 000, then consumption spending will change from r5 500 to r6 200.
d. the value 0.6 represents the marginal propensity to consume, meaning 60 cents out of each rand of disposable income is spent on consumption.

Answer 1

Statement c is incorrect because the calculation of the change in consumption with a rise in disposable income from R5,000 to R6,000 should be an increase of R600, leading to a new consumption level of R6,100, not R6,200 as stated. The correct option is a. if autonomous consumption increases, the marginal propensity will not be affected.

Step-by-step explanation:

When assessing the consumption function of Country Impala with the given equation, C = 2,500 + 0.6YD, it's important to consider the roles of autonomous consumption and the marginal propensity to consume (MPC). Autonomous consumption is the part of consumption that does not depend on current income, which in this case is 2,500.

The MPC is the fraction of additional disposable income that is spent on consumption, represented here by 0.6, which means that 60 cents of every Rand of increased disposable income is consumed. Statement c appears to be incorrect as it calculates the change in consumption incorrectly.

The consumption change with the rise in disposable income from R5,000 to R6,000 should actually be R600 (0.6 × R1,000), which means consumption would change from R5,500 to R6,100, not R6,200 as the statement claims.