If Don spends $10 000 on consumption when he has no disposable income and then spends 75 cents out of every dollar of disposable income he earns on consumption,which of the following statements about Don's consumption is the most accurate?
A)Don's MPC equals 0.75.
B)Don's APC will rise as his income rises.
C)Don spends $20 000 on consumption when his disposable income is $20 000.
D)Don's APC equals 0.75.

Question

Quizplus · Accepted Answer

MPC (marginal propensity to consume) is the change in consumption divided by the change in disposable income. Since Don spends 75 cents out of every dollar of disposable income he earns on consumption, his MPC is 0.75. Option B is incorrect because it implies that Don's APC (average propensity to consume) will rise as his income rises, but we don't have enough information to make that conclusion. Option C is also incorrect because it assumes that Don's consumption will double as his disposable income doubles, which is not necessarily true. Option D is incorrect because Don's APC is the ratio of consumption to total income, not the ratio of change in consumption to change in income.

If Don Spends $10 000 on Consumption When He Has