Consider the following Data: MPS = .2 Autonomous spending is 100 What is the consumption function?

Expert Solution

The consumption function describes the relationship between consumption and disposable income (income after tax). Autonomous consumption is amount people consume even without any income. It might be possible that they pool in from their savings, but this amount is consumed even without any income. Here, autonomous spending or consumption is given as 100.

MPS or marginal propensity to save is the fraction of money you save out of your disposable income. MPC or marginal propensity to consume is the fraction of money you consume out of your disposable income. Thus, we have MPS + MPC = Y, where Y denotes the total income.

Thus, we have MPC = 1 - MPS.

MPS = 0.2

Therefore, MPC = 1 - 0.2 = 0.8

A consumption function is thus given as the sum of the autonomous consumption and MPC*Y. Let C denote total consumption.

Therefore the consumption function as a function of income is given by:

Rahul Sunny answered 2 months ago

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