Question

Suppose that consumption is $400 and that the marginal propensity to consume is .8. If disposable income increases by $1200, consumption spending will increase by: (Don't feel guilty if you used a calculator here, you will able to use one on the AP exam this year!)

Answer 1

Consumption will increase by $960

Step-by-step explanation:

Consumption Function is a function showing consumption & income relationship, signifying how consumption is dependent on income.

C = a + b.Y ;

where C = Consumption ; a = Autonomous consumption at 0 income level; Y = Income ; b = Marginal Propensity to consume, i.e Change (addition) in consumption due to change (additional) Income = ΔC /ΔY.

MPC = ΔC /ΔY

Given : MPC = 0.8 , ΔY = 1200

0.8 = ΔC / 1200

ΔC = 1200 (0.8)

ΔC [Change in Consumption] = 960