Refer to the consumption schedule shown in the graph. As income falls from level 3 to level 2, the amount of
A) consumption increases and the amount of dissaving increases.
B) consumption decreases and the amount of dissaving decreases.
C) consumption decreases and the amount of saving decreases.
D) consumption decreases and the amount of saving increases.

Question

Refer to the consumption schedule shown in the graph. As income falls from level 3 to level 2, the amount of
A) consumption increases and the amount of dissaving increases. 
B) consumption decreases and the amount of dissaving decreases. 
C) consumption decreases and the amount of saving decreases. 
D) consumption decreases and the amount of saving increases.

Quizplus · Accepted Answer

As income falls from level 3 to level 2, the consumption decreases because the marginal propensity to consume, which is the slope of the consumption function, is less than one. Moreover, the amount of saving also decreases as disposable income falls, since a part of the fall in income is used to maintain a fixed level of consumption expenditure. Therefore, Option C is the correct answer. Option A is incorrect because as income falls, dissaving would decrease, not increase. Option B is incorrect for the same reason, and also because as consumption decreases, dissaving would not increase. Option D is incorrect because as income falls, the amount of saving decreases, but the statement about consumption is incorrect.

Refer to the Consumption Schedule Shown in the Graph