Question

12. If your disposable income falls from $55,000 to $50,000 and your consumption falls from $40,000 to $38,000, your marginal propensity to save is:

Answer 1

Answer:

Marginal Propensity to save=0.6

Explanation:

In order to calculate Marginal Propensity of save, we have to find the marginal Propensity to consume.

Marginal Propensity to consume=Consumption Change/Income change

Marginal Propensity to consume=$\frac{\Delta\ Consumption}{\Delta\ income}$

Change in Consumption=$40,000-$38,000

Change in Consumption=$2000

Change in income=$55,000-$50,000

Change in income=$5,000

Marginal Propensity to consume=$\frac{2000}{5000}$

Marginal Propensity to consume= 0.4

Now,

Marginal Propensity to consume + Marginal Propensity to save=1

0.4 + Marginal Propensity of save=1

Marginal Propensity of save=1-0.4

Marginal Propensity to save=0.6