Exhibit 8-1 Disposable income and consumption data

In Exhibit 8-1, when disposable income is increased from $2,000 to $3,000 to $4,000, the marginal propensity to consume

Question

Exhibit 8-1 Disposable income and consumption data

In Exhibit 8-1, when disposable income is increased from $2,000 to $3,000 to $4,000, the marginal propensity to consume

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is the proportion of an increase in disposable income that is spent on consumption. To calculate the MPC, we can look at the change in consumption divided by the change in disposable income.

When disposable income increases from $2,000 to $3,000, consumption increases from $2,400 to $2,900, resulting in an MPC of (2,900-2,400)/(3,000-2,000) = 0.5.

When disposable income increases from $3,000 to $4,000, consumption increases from $3,200 to $3,600, resulting in an MPC of (3,600-3,200)/(4,000-3,000) = 0.4.

Therefore, as disposable income increases, the MPC decreases from 0.5 to 0.4. This means that consumers are less likely to spend a higher proportion of their income as their income increases.

The correct answer is D) decreases from 0.7 to 0.6.

Exhibit 8-1 Disposable Income and Consumption Data