Question

First Part (Theeretically and graphically) A- The consumption fimetion Expressed quantitatively O- Exogenous consumption Concept - The List factors which Exogenous eusumption depend, ®- vidogenous consumption Concept @-Endogenous Consumption depends disposable income - The marginal propensity to consume.

Answer 1

(1)

It shall be noted that exogenous consumption is autonomous consumption, which is the consumption expenditure that occurs at a zero levels of income.

Such consumption is financed by borrowing or using up savings.

(2)

The level of autonomous consumption depends upon:

a) Assets such as houses – with assets, people can gain equity withdrawal

b) Expected future income gives consumers more confidence to borrow.

c) Difficulty/ease of borrowing money to finance the autonomous consumption.

d) Time period. In the short-term, people have commitments to pay bills so autonomous consumption is quite high. However, if the period of no income persists, individuals will ‘downsize’ – ending phone contracts, move to cheaper accommodation, and every trying to grow your own vegetables.

e) Levels of saving

f) Minimum standards of living and ideas of absolute poverty.

(3)

Endogenous consumption is the level of consumption that is dependent on the level of income or any other variable.

с Consumer Spending 45 degree line (Y=C) Cl= a + b(Y) so autonomous consumption ΔΥ a = autonomous consumption b = (slope) = (MPC) = AC/AY a Real disposable income

(4)

Endogenous consumption is the level of consumption that is dependent on the level of disposable income.

Of the earnings, the consumers pay taxes to the government. Post-tax income is what it can use for saving or purchase of durable & non-durable goods.

Thus, the portion of post-tax income used for consumption is endogenous consumption.

(5)

The rate of change of the consumption per unit change in the level of income is called the marginal rate of consumption (MPC).