Question

In a simple economy​ (assume there are no​ taxes, thus Y is disposable​ income), the consumption function is Upper C equals 1000 plus 0.9 Upper YC = 1000 + 0.9Y. ​

Thus, autonomous consumption is _________ nothing and the marginal propensity to consume is ______________.
A consumer whose income increases by​ $100 will increase consumption by ​$ ____________.

Answer 1

Autonomous consumption is $1,000 and the marginal propensity to consume is 0.9.

A consumer whose income increases by​ $100 will increase consumption by ​$90.

Step-by-step explanation:

Given C = 1000 + 0.9Y

Autonomous consumption refers to consumption expenditure of consumers that does not depend on income. Therefore, autonomous consumption is therefore the consumption expenditure made by the consumers when they do not have income or when income is zero (i.e. when Y = 0).

Substituting for Y = 0 into the consumption function, we can obtain autonomous consumption is follows:

Autonomous consumption = 1000 + (0.9 * 0) = 1,000

The marginal propensity to consume refers to the proportion of the increase in disposable income that is spent on the consumption of goods and services by a consumer. From the consumption function, the marginal propensity to consume is 0.9.

Since marginal propensity to consume is 0.9, a consumer whose income increases by​ $100 will therefore increase consumption by $90 (i.e. $100 * 0.9 = $90).