Linda earned an income of $3,000 per month, which has now increased to $3,500 per month. She saves 10 percent and spends the remainder on food, lodging, and other expenses. So far, she has managed to save $20,000. What is her marginal propensity to consume?
A) Her marginal propensity to consume is 0.99.
B) Her marginal propensity to consume is 0.90.
C) Her marginal propensity to consume is 0.86.
D) Her marginal propensity to consume is 0.10.
E) Her marginal propensity to consume is 0.01.

Question

Quizplus · Accepted Answer

Linda's current income is $3,500 per month and she saves 10% of it, which is $350. Her total expenses are therefore $3,150 ($3,500 - $350). We know that so far she has saved $20,000, which means that she has been saving for (20,000 / 350 = 57) 57 months. During this time, she has spent (57 x $3,150 = $179,550) $179,550 on expenses. Her total income during this time would have been (57 x $3,500 = $199,500) $199,500. Therefore, her marginal propensity to consume would be (($199,500 - $20,000) / $199,500) = 0.90 or 90%.

Linda Earned an Income of $3,000 Per Month, Which Has