When Tyson's income was $50,000 per year, his consumption was $47,500, and his saving was $2,500. Tyson recently got a $5,000 raise. He raised his consumption to $51,500 and his saving to $3,500. Tyson's marginal propensity to consume is

Question

Quizplus · Accepted Answer

Marginal propensity to consume (MPC) is the proportion of an increase in income that is spent on consumption. It is calculated by dividing the change in consumption by the change in income.

In this case, Tyson's initial income was $50,000 and his consumption was $47,500, so his initial saving was $2,500. Then he got a $5,000 raise, which he split between consumption ($51,500) and saving ($3,500).

Therefore, his change in income was $5,000 and his change in consumption was $4,000 ($51,500 - $47,500).

MPC = Change in consumption / Change in income 
MPC = $4,000 / $5,000 
MPC = 0.8

Therefore, Tyson's marginal propensity to consume is 0.8, which means that for every dollar increase in income, he will spend 80 cents and save 20 cents.

When Tyson's Income Was $50,000 Per Year, His Consumption Was