Question

24. Under what conditions would the APC equal the MPC at all levels of disposable income? Can you explain each correct and incorrect answers?
25. 1. When autonomous consumption equals 0.
26. 2. When there is saving at very high levels of disposable income.
27. 3. When disposable income is greater than consumption.
28. 4. When the aggregate expenditure line is horizontal.

Answer 1

Answer: When autonomous consumption equals 0.

The consumption is a function of income or more precisely disposable income, i.e., income after tax(Yd = Y -T). The consumption function can be written as;

C = a + bYd .....(1) , where 'a' is an autonomous consumption, that doesn't depend on disposable income(Yd).

Now, if the autonomous consumption is '0', then the consumption function will be as follows;

C = bYd .....(1')

Let us now see what will be the APC(average propensity to consume) and MPC(marginal propensity to consume) of the above consumption function.

Dividing equation(1') by Yd, we get

C / Yd = b

APC = b

Now, differentiating equation(1') with respect to Yd, we get,

dC / dYd = b

MPC = b

APC = MPC = b

Thus we see that when autonomous consumption equals 0, then APC is equal to MPC at all levels of disposable income.

________________________________________________________________

If there is saving at very high levels of disposable income, a part of income is used to save.Now, higher the income, lower will be the APC but for a straight line consumption function, the MPC remains constant. So APC is not equal to MPC.
_____________________________________________

When disposable income is greater than consumption, then APC gradually falls with the rise in income, and MPC remains constant. Thus, APC is not equal to MPC.

_______________________________________________

When the aggregate expenditure line is horizontal, then APC decreases with rises in income, and the MPC is zero.

So, APC is not equal to MPC.

______________________________________________