The table below shows disposable income and desired consumption for a closed economy with no government. TABLE 21-1 Refer to Table 21-1.The marginal propensity to save is equal to
A)0.2.
B)0.4.
C)0.6.
D)0.67.
E)0.8.

Question

The table below shows disposable income and desired consumption for a closed economy with no government.  TABLE 21-1 Refer to Table 21-1.The marginal propensity to save is equal to
A)0.2. 
B)0.4. 
C)0.6. 
D)0.67. 
E)0.8.

Quizplus · Accepted Answer

The marginal propensity to save (MPS) is the fraction of an increase in income that households save instead of consuming. It can be calculated as the change in saving divided by the change in income. In this case, we can use the data in the table to find the change in saving and income between each level.

For example, between the first and second levels, income increases from $100 to $200, and desired consumption increases from $160 to $280. The change in income is $100, and the change in saving is $20 ($280 - $260). Therefore, the MPS is 0.2 ($20/$100).

Calculating the MPS for the other changes gives us:

- Between levels 2 and 3: MPS = 0.4
- Between levels 3 and 4: MPS = 0.6
- Between levels 4 and 5: MPS = 0.67
- Between levels 5 and 6: MPS = 0.8

The average MPS over the whole range of income is the weighted average of these values, where the weights are the changes in income. We can calculate this as:

(0.2*100 + 0.4*100 + 0.6*100 + 0.67*100 + 0.8*100)/500 = 0.54

Therefore, the best choice is C, 0.6, which is the MPS between the third and fourth levels and is closest to the average MPS of 0.54.

The Table Below Shows Disposable Income and Desired Consumption for a Closed