Question

Total planned expenditure (equals total output) is 14,000 when autonomous consumption expenditure is 450. When autonomous consumption expenditure falls to 400, total planned expenditure (equals total output) is 13,800. The marginal propensity to consume is _______. A) 0.89 B) 0.75 C) 0.99 D) 0.44

Answer 1

The calculated marginal propensity to consume (MPC) is 1, which is found by dividing the change in consumption (200) by the change in income (200). However, this does not match the provided answer choices, indicating a potential error in the question.

Step-by-step explanation:

The marginal propensity to consume (MPC) represents the portion of additional income that a household decides to spend on consumption as opposed to saving. To calculate the MPC, we can use the change in consumption over the change in income. In this scenario, when autonomous consumption expenditure decreases from 450 to 400, total planned expenditure reduces from 14,000 to 13,800. This 200 change in consumption, divided by the 200 fall in income (because consumption and output are the same), gives us an MPC of 1 (200/200 = 1). However, there seems to be a misunderstanding in the question, as no provided answer choices match the calculated value of 1. Typically, the MPC is less than 1, and the provided options are also all less than 1, suggesting that there might be additional information or a correction needed to accurately solve the problem.

Answer 2

The marginal propensity to consume = 0.25

Step-by-step explanation:

Given:

Planned expenditure = 14,000

Consumption expenditure = 450

New consumption expenditure = 400

New planned expenditure = 13,800

Find:

The marginal propensity to consume

Computation:

The marginal propensity to consume = [Consumption expenditure - New consumption expenditure] / [Planned expenditure - New planned expenditure]

The marginal propensity to consume = [450 - 400] / [14,000 - 13,800]

The marginal propensity to consume = 50 / 200

The marginal propensity to consume = 0.25