Question

) Suppose that the linear equation for consumption in a hypothetical economy is C = $40 + .8Y. Also suppose that income (Y) is $400. Determine (a) the marginal propensity to consume, (b) the marginal propensity to save, (c) the level of consumption, (d) the average propensity to consume, (e) the level of saving, and (f) the average propensity to save.

Answer 1

Answer:

(a) The marginal propensity to consume is equal to 0.8.

(b) The marginal propensity to save is equal to 0.2.

(c) The level of consumption is equal to $360.

(d) The average propensity to consume is equal to 0.90.

(e) The level of saving is equal to $40.

(f) The average propensity to save is equal to 0.10.

Explanation:

Given:

C = $40 + 0.8Y ................... (1)

Y = $400 .............................. (2)

(a) the marginal propensity to consume (MPC)

This can be determined by differentiating equation (1) with respect to Y as follows:

MPC = dC/dY = 0.8

Therefore, the marginal propensity to consume is equal to 0.8.

(b) the marginal propensity to save (MPS)

MPS = 1 – MPC

Since MPC = 0.8, we have:

MPS = 1 – 0.8 = 0.2

Therefore, the marginal propensity to save is equal to 0.2.

(c) the level of consumption (C)

Since Y = $400, we substitute into equation (1) to have:

C = $40 + (0.8 * $400) = $40 + $320 = $360

Therefore, the level of consumption is equal to $360.

(d) the average propensity to consume (APC)

This can be calculated as follows:

APC = C / Y = $360 / $400 = 0.90

Therefore, the average propensity to consume is 0.90.

(e) the level of saving (S)

This can be calculated as follows:

S = Y - C = $400 - $360 = $40

Therefore, the level of saving is $40.

(f) the average propensity to save (APS)

This can be calculated as follows:

APS = S / Y = $40 / $400 = 0.10

Therefore, the average propensity to save is 0.10.