Question

Table 1

Disposable Income (billions $/year)	Total Consumption (billions $/year)
$ 0	$50
200	210

Calculate the marginal propensity to consume in Table 1.

Find the consumption function consistent with the data in Table 1.

At which income level does consumption equal income in Table 1?

What is the rate of saving when income equals $1,000 billion in Table 1?

Answer 1

1.

Calculate the marginal propensity to consume -

Change in disposable income = $200 billion - $0 billion = $200 billion

Change in consumption = $210 billion - $50 billion = $160 billion

MPC = Change in consumption/Change in disposable income = $160 billion/$200 billion = 0.8

The marginal propensity to consume is 0.8

2.

Consumption function is stated as follows -

C = a + bY

Where,

a = Consumption at zero level of income

b = MPC

In given case,

Consumption at zero level of income is $50 billion.

MPC is 0.8

So,

The consumption function consistent with given data is C = 50 + 0.8Y

3.

Equating income and consumption function,

Y = 50 + 0.8Y

Y - 0.8Y = 50

0.2Y = 50

Y = 50/0.2 = 250

The income level at which consumption equal income is $250 billion.

4.

Income = $1,000 billion

Consumption = 50 + 0.8Y = 50 + (0.8*$1,000) = 50 + 800 = 850

Consumption is $850 billion

Saving = Income - Consumption = $1,000 billion - $850 billion = $150 billion

Calculate the rate of saivng -

Rate of saving = (Saving/Income) * 100

Rate of saving = ($150 billion/$1,000 billion) * 100 = 15%

The rate of saivng is 15 percent.