Question

Assume that Miriam’s consumption function is C = a + b(Y d), where Y d = (Y − T ) is disposable income, defined as the difference between income Y and taxes T. You observed that, after an increase in taxes T by $80, Miriam’s consumption C decreased by $60. If Miriam’s income (Y ) did not change, you can deduce that her marginal propensity to consume (MPC) is

23. Assume that Miriam's consumption function is C = a +b(yd), where yd = (Y – T) is disposable income, defined as the difference between income Y and taxes T. You observed that, after an increase in taxes T by $80, Miriam's consumption C decreased by $60. If Miriam's income (Y) did not change, you can deduce that her marginal propensity to consume (MPC) is (a) 0.6 (b) 0.75 (c) 0.8 (d) -0.6

Answer 1

THE SOLUTION IS AS FOLLOWS-

Given :- orginally, consumption function is C = blyd) yd Y-T ब » c = atbly-T) After - T increases to T+80 7 and C decreases to c-60 Y same new equation, C-60= atblY-T-80) Subtracting @ from @ C - c-bo atb (Y-T-80) atb (Y-T) C - -60s -T bly-T-80) - b (Y-T) - 60 = b [Y-T-80-Y +T] -60 b (-80) 806 bo b = 60 BO

b= 0.75

FIRST WE USED THE GIVEN INFORMATION TO FORM THE EQUATION (2)

THEN WE SUBTRACTED EQUATION 1 FROM 2 AND THE SOLVED IT TO GET THE VALUE OF b.

HENCE THE MPC IS 0.75 .

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