Assume that the consumption function is given by C = 150 + 0.85(Y - T) and the tax function is given by T = t
+ t Y. If t
Increases by 1 unit, then consumption:
0 1 0
A)decreases by 0.85 unit.
B)decreases by 0.15 unit.
C)increases by 0.15 unit.
D)increases by 0.85 unit.

Question

Quizplus · Accepted Answer

We differentiate the consumption function with respect to T and get:
dC/dT = dC/d(Y-T) * d(Y-T)/dT = -0.85 * dt/dT = -0.85
Therefore, if T increases by 1 unit (dt=1), consumption will decrease by 0.85 units.

Assume That the Consumption Function Is Given by C =