$$\begin{array} { | c | c | }
\hline \text { Disposable Income } \left( Y _ { d } \right) & \text { Consumption (C) } \
\hline \$ 0 & \$ 40 \
\hline 100 & 100 \
\hline 200 & 160 \
\hline 300 & 220 \
\hline 400 & 280 \
\hline
\end{array}$$ (Advanced analysis) Which of the following equations correctly represents the given data?
A) Yd = 40 + 0.6C.
B) C = 60 + 0.4Yd.
C) C = 40 + 0.6Yd.
D) C = 0.6Yd.

Question

$$\begin{array} { | c | c | } 
\hline \text { Disposable Income } \left( Y _ { d } \right) & \text { Consumption (C) } \
\hline \$ 0 & \$ 40 \
\hline 100 & 100 \
\hline 200 & 160 \
\hline 300 & 220 \
\hline 400 & 280 \
\hline
\end{array}$$ (Advanced analysis) Which of the following equations correctly represents the given data?
A) Yd = 40 + 0.6C.
B) C = 60 + 0.4Yd.
C) C = 40 + 0.6Yd.
D) C = 0.6Yd.

Quizplus · Accepted Answer

We can see that consumption (C) increases as disposable income (Yd) increases. In addition, the change in consumption is not as large as the change in disposable income. This implies that the marginal propensity to consume (MPC) is less than 1.0.

To find the equation that represents the data, we can use the formula for the consumption function:

C = a + bYd

where a is autonomous consumption (consumption when Yd = 0) and b is the marginal propensity to consume (MPC).

We can find a and b using the first two data points:

When Yd = 0, C = 40, so a = 40.

When Yd = 100, C = 100, so:

100 = a + b(100)
100 = 40 + 100b
b = 0.6

Therefore, the equation that represents the data is:

C = 40 + 0.6Yd

So, the correct choice is C.

(Advanced Analysis) Which of the Following Equations Correctly Represents the