Question

What if you got a pay raise where you work of $1 dollar per hour. How much of that extra money would you spend and how much would you save? What would be your MPC based on this? If Jeff Bezos got an extra $1 million dollars how much do you think he would spend and how much would he save? What would be his MPC? Is it greater or less than yours? Why? What are the implications for tax policy and public assistance policies based on differing MPC's?

Answer 1

The marginal propensity to consume is quite low for people with very high income suggest Jeff bezos. This is because they have already very high level of consumption and if their income is increased by a certain amount they are not going to increase their consumption by much. We expect that people therefore we can expect that people like Jeff bezos must be having an MPC of Less than 0.5. People who have less income, often have a very high MPC, which is mostly around 0.8 or 0.9. This is because their income is less and whenever they experience an increase in income there likely to spend most of it.

(1 - MPC) gives marginal propensity to save. Once again people with very high income are likely to have a very high MPS because of low MPC and people with very low income are likely to have very low MPS

Policies that are made for public assistance such as social welfare schemes as well as tax policies rely heavily on the estimation of MPC. This is because the marginal propensity to consume plays an important role in magnifying the multiplier effect. If the marginal propensity to consume is very high then every $1 increase in income will translate into greater and greater multiplier effect. If MPC is very small, public policy will have to use a huge expenditure in order to bring the same effect which can be done with a low expenditure when MPC is very high.