If Matt's disposable income increases from $4,000 to $4,500 and his level of saving increases from $200 to $325, it may be concluded that his marginal propensity to:
A) Consume is .80
B) Consume is .75
C) Consume is .60
D) Save is .30

Question

Quizplus · Accepted Answer

Marginal Propensity to Consume (MPC) is the ratio of change in consumption to the change in disposable income.

MPC = Change in Consumption / Change in Disposable Income

Here, the change in disposable income is $4,500 - $4,000 = $500

And, the change in saving is $325 - $200 = $125

So, the change in consumption will be:

Change in Consumption = Change in Disposable Income - Change in Saving

Change in Consumption = $500 - $125 = $375

Therefore, MPC = Change in Consumption / Change in Disposable Income

MPC = $375 / $500 = 0.75

Hence, the correct answer is B) Consume is .75

If Matt's Disposable Income Increases from $4,000 to $4,500 and His