Question

The equation for a simple consumption function is written as C = a + bY. The letter a represents the ________ part of consumption. The letters bY represent the ________ part of consumption. When graphing a consumption function, the vertical intercept is given by the letter ________ , and the slope of the function is given by the letter ________.

Answer 1

In the equation:

C = a + bY

we see that if Y = 0, C will be equal to 'a'.This means that 'a' represents that part of consumption that is not dependent on income. This part of consumption will be done by borrowing or using savings.

So, 'a' represents the autonomous part of consumption.

The term bY is then, that part of consumption that depends on income.As income increases, this part of consumption will also increase.

So, 'bY' represents the induced part of consumption.

In a graph, we know that vertical intercept means the value of y when x is 0.

So, for consumption function C = a + bY, consumption is plotted on y-axis and income is plotted on x-axis.

For this function, the vertical intercept is obtained by setting Y= 0. So,

C = a + b x 0

C = a + 0

C = a

This means that 'a' is the vertical intercept.

In the consumption function b represents the marginal propensity to consume. So, when income increases by 1 unit, b shows by how much amount consumption will increase. This is same as slope of a line which measures the change in y for a unit change in x.

Also, if we compare the consumption function,

C = a + bY with the general equation of line,

y= c + mx, where m = slope, we find that:

The slope of the consumption function is b.