Suppose that personal income rises from $3000 to $4000 per month,and consumption rises from $2000 to $2600 per month.If taxes are 25 percent of income,what must marginal propensity to consume be?
A)0.60
B)0.70
C)0.80
D)0.90

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in disposable income. Disposable income is income after taxes. Here, the change in income is $1000, and taxes are 25%, so the change in disposable income is $750. The change in consumption is $600. Therefore, MPC = $600 / $750 = 0.80.

Suppose That Personal Income Rises from $3000 to $4000 Per