Question

Data on before-tax income, taxes paid, and consumption spending for the Simpson family in various years are given below.

Before-tax income ($)	Taxes paid ($)	Consumption spending ($)
25,000	3,000	20,000
27,000	3,500	21,350
28,000	3,700	22,070
30,000	4,000	23,600

a. Graph the Simpsons’ consumption function and find their household’s marginal propensity to consume.

Instructions: On the graph below, use the line tool provided. Click and drag your mouse to draw a diagonal, straight line by using the precise coordinates for the first and last values given in the table.

Instruction: Enter your response rounded to one decimal place.

The Marginal propensity to consume: .


b. How much would you expect the Simpsons to consume if their income was $32,000 and they paid taxes of $5,000?

Consumption: $.


c. Homer Simpson wins a lottery prize. As a result, the Simpson family increases its consumption by $1,000 at each level of after-tax income. (“Income” does not include the prize money.) How does this change affect the graph of their consumption function?

Their consumption function (Click to select)shifts upwardremains unchangedshifts downward.

How does it affect their marginal propensity to consume?

Their marginal propensity to consume (Click to select)does not changeincreasesdecreases.

Answer 1