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 defined as the change in consumption divided by the change in disposable income. It measures the amount by which consumption spending increases when disposable income increases by $1.

If the MPC is equal to 0.3, it means that for every additional $1 of disposable income, consumption spending will increase by $0.3. In other words, 30% of any increase in disposable income will be spent on consumption.

Looking at the consumption function in the graph, we can see that it intersects the 45-degree line (which represents the level of disposable income) at an income level of $400. If the MPC is 0.3, then consumption spending will equal disposable income at a level of income that is less than $400. This is because households will not spend all of their additional income, but only 30% of it.

Therefore, the correct answer is D) consumption spending would equal disposable income at an income level less than $400.

The Figure Given Below Represents the Consumption Function of a Country