Question

If Carol's disposable income increases from $1,200 to $1,700 and her savings increases from $200 to $300, then: marginal propensity to save is three-fifths. marginal propensity to consume is one-half. marginal propensity to consume is four-fifths. marginal propensity to consume is one-fifths.

Answer 1

Answer:

The Marginal Propsensity to Consume is four-fifths

Explanation:

To answer the question, an indirect approach must be used.

1. First, we are given data on disposable income and Savings, it is, therefore, easy to assume that we are to calculate the Propensity to Save.

• The Formula for calculating the Propensity to Save is:  Change in Savings /Change in Income.

• MPS=ΔS/ΔY

• Using the data we have:

• Change in Savings: $300-$200= $100

• Change in Income: $1,700-$1,200=$500

• MPS= $100/$500= One-fifth
• But hold on: One-fifths Marginal propensity to save is not part of the options, so we continue:

• If Marginal Propensity to Save is One-Fifths, then based on a formula the Marginal Propensity to Consume is the balance of the Subtraction of One-Fifths from One:

• 1-1/5= 4/5.

• The Marginal Propensity to Consume is therefore four-fifths.

Note:

• If the data given was increase in consumption instead of savings then we would have directly calculated Marginal Propensity to Consume= Change in Consumption/Change in Income or

• MPC= ΔC/ΔY