What is consumption function? What is the marginal propensity to consume? What does a steep consumption...

What is consumption function? What is the marginal propensity to consume? What does a steep consumption function mean?

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Expert Solution

The relationship between Income and Consumption can be expressed in the form of the consumption function. In other words, The consumption function, is an economic formula that represents the functional relationship between total consumption and gross national income.

Consumption function can be written as C = C_a + bY. where C_a > 0, 0<b<1.

C_a is the intercept of the consumption function showing the amount of consumption at 0 level of income. It is called autonomous consumption.
The constant 'b' is the slope of the consumption function known as the marginal propensity to consume. It shows the increase in the consumption per unit increases in the income. Since, b is less than 1.

Marginal propensity to consume determines the slope of this curve. As disposable income increases from left to right it is modified by the MPC. A high MPC of 0.9 would lead to a steep curve. This type of consumption function is called steep consumption function.

Rahul Sunny answered 1 year ago

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