Question

Chapter 13 Homework 00 Data on before tax income taxes paid, and consumption spending for the Simpson family in various years are given below. Before-tax inco ($) 25,800 27.000 28,69 Taxes paid (s) 3,00 Consumption spending ($) 20,000 21,350 22.07 23.600 4. Ono a. Graph the Simpsons' consumption function, then find their household's marginal propensity to consume and the intercept of the consumption function 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. Consumption Function References Consumption spending, 24400 24,000 23.500 23.200 22.800 22.400 22.000 21.600 21200 201800 20 400 20.000 19.500

Answer 1

Befor tax income	Taxes Paid	Disposable income	Consumption
25000	3000	22000	20000
27000	3500	23500	21350
28000	3700	24300	22070
30000	4000	26000	23600

Disposable income = (income before tax - tax)

24000 23500 23000 22500 22000 21500 21000 20500 20000 19500 21500 22000 22500 23000 23500 24000 24500 25000 25500 26000 26500 disposable income consumption

MPC = (change in consumption) / (change in disposable income)

As income rise from $22000 to $23500, the consumption expenditure of the person increase from $20000 to $21350.

MPC = ( ($21350 - $20000) / ($23500 - $22000)

MPC = $1350/$1500

MPC = 0.9

Thus the marginal propensity to consume is 0.9

General form of consumption function:

C = c + MPC (Yd)

Where, C is consumption expenditure, c is autonomous expenditure (intercept of consumption function)

mpc is slope of consumption function, Yd is disposable function.

Substitute the value of C = 20000, Yd = 22000, MPC = 0.9

C = c +MPC (Yd)

20000 = c + (0.9 * 22000)

c = 20000 - 19800

c = 200

Thus, the intercept of consumption function is $200.

(b) C = c + MPC (yd)

C = 200 + 0.9 Yd (Yd = Y -T)

C = 200 + 0.9 (Y - T)

C = 200 + 0.9 (32000 - 5000)

C =$24500

Thus, the Simpsons must spend $24500 as consumption expenditure.

(C) it is given that persons wins a lottery, which increases the expenditure by $1000 at each level of disposable income. It means the autonomous consumption increases from $200 to $1200. Hence the consumption function shifts upward by $1000.

This will shift the consumption function upward and does not change the slope of function. Hence MPC remains same.

Answer: Option (C)

New function : C = 1200 + 0.9 (Y -T)