Question

50-1/1

Assuming competitive markets with typical supply and demand curves, which of the following statements is correct?

• An increase in demand with no change in supply will result in an increase in sales.

• An increase in supply with no change in demand will result in an increase in price.

• An increase in supply with a decrease in demand will result in an increase in price.

• An increase in supply with no change in demand will result in a decline in sales.

53.1/1

(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. The marginal propensity to consume in economy (1) is

• 0.7.

• 0.5.

• 0.3.

• 0.8.

Answer 1

50-1/1. In competitive markets with typical downward sloping demand curve and upward rising supply curve, an increase in demand with unchanged supply will lead to an increase in sales.

This has also been shown graphically:

When demand increases with no change in supply, only the demand curve shifts outward from D to D’. As a result, equilibrium price and sales both increase.

So, answer is Option A.

53.1/1

(1)			(2)		(3)
DI ($)	C ($)	MPC	DI	C	DI	C
0	4	-	$0	$65	$0	$2
10	11	0.7	80	125	20	20
20	18	0.7	160	185	40	38
30	25	0.7	240	245	60	56
40	32	0.7	320	305	80	74
50	39	0.7	400	365	100	92

The marginal propensity to consume is 0.7. It has been calculated in the above table for economy (1).

Marginal propensity to consume determines what fraction of the disposable income is to be consumed.

Mathematically, it is calculated as follows:

Marginal propensity to consume = (Change in consumption)/(Change in DI).

For example, when DI = 0, C = 4

And when DI = 10, C = 11.

So, MPC = (11-4)/(10-0) = 7/10 = 0.7

So, answer is Option A.