Question

(1)		(2)		(3)
DI	C	DI	C	DI	C
$0	$4	$0	$65	$0	$2
10	11	80	125	20	20
20	18	160	185	40	38
30	25	240	245	60	56
40	32	320	305	80	74
50	39	400	365	100	92

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. At an income level of $40 billion, the average propensity to consume

		is highest in economy (3).
		is highest in economy (1).
		cannot be determined from the data given.
		is highest in economy (2).

Answer 1

The average propensity to consume (APC) is the ratio of consumption expenditures (C) to disposable income (DI).

APC = C / DI.

At an income level of $40 billion

APC of Economy 1 = 32/40 = 0.80

APC of Economy 3 =38/40 = 0.95

The exact consumption expenditure at income level of $40 billion is not given for Economy 2, but we assume that they maintain the minimum consumption expenditure at disposable income $40 billion (i,e., consumption expenditure at $40 billion is equal to consumption expenditure at $0). When income is 0, the minimum level of consumption that takes place in the economy which is the basic necessity of life.

Then APC of Economy 3 = 65/40 = 1.625

Even after assuming the minimum level of consumption at disposable income $40 billion for Economy 2, the APC of Economy 2 is the highest.