Question

Suppose that when Sue’s disposable income is $10,000, she spends $8,000, and when her disposable income is $20,000, she spends $14,000. Sue’s autonomous consumer spending is equal to __________ and her MPS is equal to __________.

Answer 1

Answer:

The correct answer is: 2,000; 0.4

Explanation:

We can write the initial consumption function as,

C = a + bY

8,000 = a + 10,000b

a = 8,000 - 10,000b

The new consumption function is,

14,000 = a + 20,000b

Putting value of a in this function

14,000 = 8,000 - 10,000b + 20,000b

14,000 - 8,000 = 10,000b

b  = $\frac{6,000}{10,000}$

b = 0.6

Putting the value of b in the initial function,

8,000 = a + 10,000 $\times$0.6

a = 8,000 - 6,000

a = $2,000

The marginal propensity to consume or b is 0.6.

The marginal propensity to save will be

= 1 - 0.6

= 0.4