Suppose that John earns a disposable annual income of $50,000 and allocates $10,000 of this for necessities. Any additional income beyond that is both spent and saved. If John's MPC is 0.8, how much money will he save?

Question

Quizplus · Accepted Answer

John's marginal propensity to consume (MPC) is 0.8, meaning he spends 80% of any additional income beyond his basic necessities. Since he allocates $10,000 for necessities out of his $50,000 income, he has $40,000 left. With an MPC of 0.8, he spends 80% of the $40,000, which is $32,000. Therefore, he saves 20% of the $40,000, which is $8,000.

Suppose That John Earns a Disposable Annual Income of $50,000