The Smith family's disposable income rose from $40 000 per year to $42 000 and their desired consumption expenditure rose from $38 000 to $39 600.It can be concluded that their
A)average propensity to consume is 0.8.
B)average propensity to save is 0.8.
C)marginal propensity to consume is $800.
D)marginal propensity to consume is 0.8.
E)marginal propensity to save is 0.8.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) can be calculated by dividing the change in consumption expenditure by the change in disposable income, which is (39600-38000)/(42000-40000) = 1600/2000 = 0.8. Therefore, the answer is D. A is incorrect because the average propensity to consume (APC) is calculated by dividing consumption expenditure by disposable income, which is (39600/42000) = 0.94. B and E are incorrect because the average propensity to save (APS) is calculated by subtracting APC from 1, which is (1-0.94) = 0.06, and the MPC and APS always add up to 1. C is incorrect because the MPC is not a dollar amount, but a ratio or percentage.

The Smith Family's Disposable Income Rose from $40 000 Per