Question

Table A Disposable Income Consumption $200 $205 225 225 250 245 275 265 285 300 Use information above to answer question 1 and 2 1. WHAT IS THE MPC. 2. If disposable income was $325, we would expect consumption to be: Table B Disposable Income Saving -$10 100 150 20 200 3. Use table B: At the $150 level of income, the average propensity to save is:

Answer 1

Solution:-

Question: - 1

(A). Marginal propensity to consume = change in consumption / change in disposable income

Disposable Income	Consumption	MPC
$200	$205	-
$225	$225	25 / 20 = 0.80
$250	$245	25 / 20 = 0.80
$275	$265	25 / 20 = 0.80
$300	$285	25 / 20 = 0.80

(B). as we can see from the given data,

As income is increasing by 25, consumption is increasing by 20

Thus, when disposable income will increase from 300 to 325, then consumption will increase from 285 to (285+20) = 305

Question: - 2

Marginal propensity to consume = change in consumption /change in disposable income
MPC=(20 - 10) / (150 - 100)
         =10/ 50
         =0.2
the marginal propensity to save=1 - MPC
                                                 = 1 - 0.2
                                                 = 0.8
                                         MPS = 0.8