Question

. Homer Simpson wins a lottery prize. As a result, the Simpson family increases its consumption by $1,000 at each level of after-tax income. ("Income" does not include the prize money.) How does this change affect their consumption function?

Answer 1

Answer:

Their consumption function would shift upwards

Explanation:

Their consumption function shifts upward because the lottery prize has given them an autonomous consumption of $1000. This prize is independent of income. At each level of income, consumption rises by $1000. Causing consumption spending to be shifted upward by $1000. The marginal propensity to consume is unaffected because increase in consumption is the same at each level of disposable income.