Suppose there are three economies with 3 different consumption functions: Country A: C = 100 + 0.8Y Country B: C = 200 + 0.75 Y
Country C: C = 75 + 0.9Y
In which of these countries is the marginal propensity to consume the largest?
A) Country B
B) Country C
C) Country A
D) All countries have the same marginal propensity to consume.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is the fraction of additional income that is spent on consumption. It can be calculated as the change in consumption divided by the change in income. In this case, the MPC for Country A is 0.8, for Country B it is 0.75, and for Country C it is 0.9. Therefore, the largest MPC is in Country C, where for every additional dollar of income, consumers will spend 90 cents on consumption.

Suppose There Are Three Economies with 3 Different Consumption Functions