The figure given below represents the consumption function of a country.
Figure 9.3

-Refer to Figure 9.3. If the marginal propensity to consume is equal to 0.3, then:
A) autonomous consumption would decrease.
B) the total amount of dissaving would increase.
C) consumption spending would equal disposable income at an income level greater than $400.
D) consumption spending would equal disposable income at an income level less than $400.
E) consumption spending would equal disposable income at the same income level of $400.

Question

The figure given below represents the consumption function of a country.
Figure 9.3
 
-Refer to Figure 9.3. If the marginal propensity to consume is equal to 0.3, then:
A) autonomous consumption would decrease. 
B) the total amount of dissaving would increase. 
C) consumption spending would equal disposable income at an income level greater than $400. 
D) consumption spending would equal disposable income at an income level less than $400. 
E) consumption spending would equal disposable income at the same income level of $400.

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is the change in consumption spending that results from a change in disposable income. If MPC is 0.3, then for every additional $1 of disposable income, consumers will spend $0.3 and save $0.7.

In the consumption function given in Figure 9.3, the slope of the line represents the MPC. The line intersects the vertical axis at $100 billion, which is the level of autonomous consumption or consumption spending that occurs even when disposable income is zero.

If MPC is 0.3, then the slope of the line is 0.3, and consumption spending will equal disposable income at an income level less than $400. This is because at an income level of $400, consumption spending is $220 billion ($100 billion of autonomous consumption plus $0.3*$300 billion of disposable income), which is less than $400 billion of disposable income. Therefore, households will save some of the additional $100 of disposable income and spend the rest. As disposable income increases beyond $400, the gap between consumption spending and disposable income will narrow but never close, as consumers will still save some of the additional income.

The Figure Given Below Represents the Consumption Function of a Country