Question

Income and Expenditure - End of Chapter Problems Individual current disposable income 3. Economists observed the only five residents of a very small economy and estimated each one's consumer spending at various levels of current disposable income. The accompanying table shows each resident's consumer spending at three income levels. Individual consumer spending by $0 $40,000 $29,000 Andre $1,000 Barbara 2,500 22,500 $20,000 $15,000 12,500 20,000 17.000 19,000 Casey Declan 2,000 5,000 4,000 38,000 29,000 34,000 Elena a. What is the marginal propensity to consume for each resident? Enter your answer in decimal form. Andre's MPC: 0.7 Barbara's MPC: 0.6 Casey's MPC 0.5 Declan's MPC: 0.75

Answer 1

(a) MPC = (Change in consumption/ Change in income)

Andre's MPC = (15000-1000)/(20000-0) = 0.5

Barbara's MPC = (12500-2500)/(20000-0)= 0.5

Casey's MPC = (20000-2000)/(20000-0)= 0.9

Declan's MPC = (17000-5000)/(20000-0)= 0.6

Elena's MPC = (19000-4000)/(20000-0)= 0.75

Each resident's consumption function is represented by the form: C = Autonomous consumption + MPC (Yd)

Autonomous consumption is equal to the amount of consumption when Yd=0.

Andre C = 1000+ 0.5Yd (because 1000 is the autonomous consumption for Andre).

Barbara C = 2500+ 0.5Yd (because 2500 is the autonomous consumption for Barbara).

Casey C = 2000 + 0.9Yd (because 2000 is the autonomous consumption for Casey).

Declan C = 5000 +0.6Yd (because 5000 is the autonomous consumption for Declan).

Elena C = 4000 + 0.75Yd (because 4000 is the autonomous consumption for Elena).

(b) Economy's MPC = (Change in whole economy consumption)/( Change in income)

When Yd = 0, Total consumption = (1000+2500+2000+5000+4000)=$14500

Because there are total 5 residents , So Yd = (20000)(5)= $100,000 , then total consumption = $(15000+12500+20000+17000+19000)= $83500

Change in C = (83500-14500)= 69000

Change in Yd = (100000-0)= 100000

Economy's MPC = (69000/100000)= 0.69

Economy's consumption function , C = 14500 + 0.69Yd (because 14500 is the economy's autonomous consumption).