Suppose consumption is $7,500 when income is $4,000 and the MPS equals 0.4. When income increases to $6,000, consumption is
A) $8,050.
B) $8,300.
C) $8,700.
D) $9,500.

Question

Quizplus · Accepted Answer

First, we can use the given MPC formula:

MPC = 1 - MPS

MPC = 1 - 0.4 = 0.6

This means that for every additional dollar of income, consumption will increase by 60 cents.

Using this information, we can calculate the new level of consumption when income increases to $6,000:

Change in income = $6,000 - $4,000 = $2,000
Change in consumption = MPC x Change in income
Change in consumption = 0.6 x $2,000
Change in consumption = $1,200

To find the new level of consumption, we add the change in consumption to the initial level of consumption:

New consumption = $7,500 + $1,200 = $8,700

Therefore, the answer is choice C, $8,700.

Suppose Consumption Is $7,500 When Income Is $4,000 and the MPS