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In: Economics

What percentage of last month’s income did you spend? How much more would you spend if you won a $1,000 lottery prize?

What percentage of last month’s income did you spend? How much more would you spend if you won a $1,000 lottery prize? A $10,000 lottery prize? Why might your average and marginal propensities to consumer differ?

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Expert Solution

Assume My income= 60000$ per annum

My monthly income = 5000$

Mostly I will spend 75% of my monthly income as I am not married. So I will save some 1500$ per month.

IF I am winning a lottery of 1000$ it will not have any effect on me as that is a little money so I will mostly try to save that money or just spend it on some things.

If I am getting a $10000 lottery definitely I will be increasing my spending as I am having more money in hand which will make me consume more. I will try to buy some luxury goods and I will try to spend more as I have more disposable income.

Here we can see that as the disposable income in my hands increase my marginal propensity to consume also increased which means I am willing to spend more and consume more due to more money in hand.

Here my average propensity to consume will decrease as my income increase my consumption will increase but I won't spend all my income which means my consumption is less than income which I earned so average propensity to consume decrease.

Rahul Sunny answered 1 year ago
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