Question

10. Complete the accompanying table. Level of output and Income (GDP = DI) Consumption Saving APC APS MPC MPS $100 $105 -$5 1.05 125 $125 1.00 150 0.97 0.94 200 $145 $165 $185 $205 $225 $245 $265 225 |||||||| 0.925 0.91 0.90 0.89 0.88 250 275 300 (a) What is the break-even level of income? How is it possible for households to dissaye at very low income levels? (b) If the proportion of total income consumed decreases and the proportion saved increases as income rises, explain how the MPC and MPS can be constant at various levels of income.

Answer 1

1.

Income	consumption	saving	APC	CHANGE IN CONSUMPTION	CHANGE IN SAVING	Change in Income	APS	MPC	MPS
$100	$105	-$5	1.05	-----	-------	-----	-----	------	------
125	125	0	1.00	20	5	25	0	0.8	0.2
150	145	5	0.97	20	5	25	0.033	0.8	0.2
175	165	10	0.94	20	5	25	0.057	0.8	0.2
200	185	15	0.925	20	5	25	0.075	0.8	0.2
225	205	20	0.91	20	5	25	0.088	0.8	0.2
250	225	25	0.90	20	5	25	0.1	0.8	0.2
275	245	30	0.89	20	5	25	0.109	0.8	0.2
300	265	35	0.88	20	5	25	0.116	0.8	0.2

Formulas:

Average Propensity to Consume(APC)=consumption/Income

Marginal Propensity to Consume(MPC)=change in consumption/change in income

Average Propensity to Save(APS)=saving/income

Marginal Propensity to save(MPS)=change in savings/change in income

To calculate a change in income , find the difference between the previous number and next number in the income column.

Similarly to calculate a change in consumption, find the difference between the previous number and next number in the consumption column.

To calculate a change in savings, find the difference between the previous number and next number in the savings column.

For all these leave the first one blank.

a.Break Even level of income=$125

its the income which equals consumption,Here at $125 of income =$125 of consumption

Households will dissave by borrowing or through previous saving.

b.MPC and MPS represent a change in consumption and saving.the MPS and MPC can be constant if the consumption and saving schedules are straight lines just as in this question and hence they do not change when the income changes and so they remain constant.