If Smith's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, it may be concluded that her marginal propensity to:
A)save is three-fifths.
B)consume is one-half.
C)consume is three-fifths.
D)consume is one-sixth.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is the proportion of additional income that is spent on consumption. To calculate the MPC in this scenario, we can use the formula:

MPC = Change in Consumption / Change in Income

The change in income is $1,700 - $1,200 = $500. The change in saving is +$100 - (-$100) = +$200. This means that consumption must have increased by $300 ($500 - $200) to account for the entire increase in income.

Therefore, the MPC = $300 / $500 = 3/5 = 0.6.

Therefore, the correct answer is C: consume is three-fifths.

If Smith's Disposable Income Increases from $1,200 to $1,700 and Her