Question

In: Economics

Disposable Income Consumption 0 $200 billion $200 billion 300 billion 400 billion 400 billion 600 billion...

Disposable Income	Consumption
0	$200 billion
$200 billion	300 billion
400 billion	400 billion
600 billion	500 billion
800 billion	600 billion

How much is the marginal propensity to consume when disposable income rises from $600 billion to $800 billion?

Select one:

a. 0.65

b. 0.5

c. 0.75

d. 0.85

Expert Solution

Answer: b. 0.5

The marginal propensity to consume(MPC) measures the change in consumption(C) for the change in disposable income(Yd).

MPC = C / Yd , where 'C' = change in consumption, 'Yd' = change in disposable income

From the given data, we see that,

When disposable income is $600 billion, the consumption is 500 billion.

When disposable income is $800 billion, the consumption is 600 billion.

The change in disposable income = Yd = $800 billion - $600 billion = $200 billion

The change in consumption = C = $600 billion - $500 billion = $100 billion

MPC = C / Yd = $100 billion / $200 billion

Or, MPC = 1/2

Or, MPC = 0.5

So, the marginal propensity to consume is 0.5.

___________________________________________________________________

Rahul Sunny answered 2 years ago

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