Suppose the consumption function is given by the equation C = 100 + 0.8YD, where YD is disposable income. What is the marginal propensity to save?

Question

Quizplus · Accepted Answer

The marginal propensity to save (MPS) is the change in saving divided by the change in income. We can find the MPC by using the consumption function: MPC = ∆C/∆YD = 0 (since there is no change in consumption when income changes by 1). Therefore, the MPS = 1 - MPC = 1 - 0 = 1. However, the question asks for the marginal propensity to save, not the marginal propensity to consume. Since the MPS is equal to 1 - MPC, and we know MPC = 0.8, we can calculate MPS = 1 - 0.8 = 0.2. Therefore, the correct answer is B.

Suppose the Consumption Function Is Given by the Equation C