Question

You and a coworker have been trying to develop a linear equation that describes the local household consumption function. Your co-worker has sent you a very short email that simply says he has finished the project and the consumption function is: C = 225 + 0.75(YD). Your job is to explain this result to your supervisor. According to this consumption function, how much consumption spending would occur if a household had disposable income of $500?

A. $600
B. $850
C. $725
D. $800

Answer 1

A. $600

Step-by-step explanation:

The consumption equation equation given as follows

C= 225 + 0.75(YD).

C- consumption, autonomous consumption - 225, 0.75- marginal propensity to consume, YD- Disposable income.

The autonomous consumption in this equation is 225, this implies that an amount equal to the figure would be spent by the household irrespective of their income.

Another portion of the consumption is that which depends on the the amount of the disposable income. This equals to the marginal propensity to consume (0.75) multiplied by the disposable income.

Y= 225 + 0.75(YD)

Y = 225 + 0.75× (500)

Y = $600