Suppose that John allocates $10,000 of his disposable income for necessities. Any additional income beyond that is both spent and saved. Assume he has a disposable annual income of $50,000 and an MPC=0.8. Based on this information the additional amount spent on non-necessities should be:
A) $10,000.
B) $40,000.
C) $32,000.
D) $35,000.

Question

Quizplus · Accepted Answer

John's MPC (marginal propensity to consume) is 0.8, which means that out of every additional dollar he earns beyond the $10,000 allocated for necessities, he will spend 80 cents and save 20 cents. Therefore, his additional spending on non-necessities will be 0.8 x ($50,000 - $10,000) = $32,000.

Suppose That John Allocates $10,000 of His Disposable Income for Necessities