Question

QUESTION ONE

1. Suppose the income increases from K50, 000 to K60, 000 and as a result consumption increases from K40, 000 to K47, 000 in Zambia. What is the marginal propensity to consume for the Zambian economy?                             [3 Marks]
2. Suppose the value of autonomous consumption is K40 000 and marginal propensity to consume is 0.6, estimate consumption at different levels of income: K0, K100, K200, K300, K400, and K500.                                               [6 Marks]
3. Given the consumption function in (b) above solve for the savings function and estimate savings at the different levels of income provided: K0, K100, K200, K300, K400, and K500.                                                                                          [8 Marks]
4. Fill the blank spaces.                                                                                       [8 Marks]

Income	Consumption	Average Propensity Consume	Marginal Propensity to Consume	Saving	Average Propensity to Save	Marginal Propensity to Save
K120	K108		…..	K12		……
K140	K124			K16	0.11
K160	K139	0.87
K180	K153			K27		0.3
K200	K167		0.7

Answer 1

a.

Y0 = 50000

Y1 = 60000

C0 = 40000

C1 = 47000

It shall be noted that marginal propensity to consume is the rate of chnage in consumption per unit change in the income.

The marginal propoensity to consume = (C1 - C0) /(Y1 - Y0) = (47000 - 40000)/(60000 - 50000) = 7000/10000 = 0.7

Hence, the marginal propoensity to consume = 0.7

b.

C_hat = 40000

Marginal Proposenity to Consume = MPC = c = 0.6

The consumption at different level of income is: C = C_hat + c*Y

Y	C_hat	C = C_hat + c*Y
0	40000	40000
100	40000	40060
200	40000	40120
300	40000	40180
400	40000	40240
500	40000	40300

c.

The Savings at different level of income is: S = Y - C

Y	C_hat	C = C_hat + c*Y	S = Y - C
0	40000	40000	-40000
100	40000	40060	-39960
200	40000	40120	-39920
300	40000	40180	-39880
400	40000	40240	-39840
500	40000	40300	-39800

d) Filling blanks:

Income	Consumption	Average Propensity Consume	Marginal Propensity to Consume	Saving	Average Propensity to Save	Marginal Propensity to Save
K120	K108	0.90	-	K12	0.10	-
K140	K124	0.89	0.80	K16	0.11	0.20
K160	K139	0.87	0.75	K21	0.13	0.25
K180	K153	0.85	0.70	K27	0.15	0.30
K200	K167	0.84	0.70	K33	0.17	0.30

Average Propensity to Consume = C/Y = Consumption/Income

Average Propensity to Save = 1 - Average Propensity to Consume

Marginal Propensity to Consume = (C1 - C0)/(Y1 - Y0)

Marginal Propensity to Save = 1 - Marginal Propensity to Consume

Saving = Income - Consumption