Total planned expenditure (equals total output)is 14,000 when autonomous consumption expenditure is 450.When autonomous consumption expenditure falls to 400,total planned expenditure (equals total output)is 13,800.The marginal propensity to consume is ________.
A)0.89
B)0.75
C)0.99
D)0.44
E)0.03

Question

Quizplus · Accepted Answer

We can use the Keynesian consumption function to find the marginal propensity to consume:

Total planned expenditure = Autonomous consumption expenditure + (Marginal propensity to consume) x Disposable income

At the first scenario:
14,000 = 450 + (MPV) x Y        (where Y is the disposable income)
we do not know the exact value of Y to solve the equation.

At the second scenario:
13,800 = 400 + (MPV) x Y
Multiplying both sides by -1, and adding to the first equation:
200 = 50 + (MPV) x Y
MPV = 150 / Y

Using the first equation, we can solve for Y:
14,000 = 450 + (150/Y) x Y
14,000 = 450 + 150
Y = 87

Now we can substitute it into the second equation to find MPV:
13,800 = 400 + MPV x 87
MPV = 9.3 / 87
MPV = 0.75

Hence, the answer is B.

Total Planned Expenditure (Equals Total Output)is 14,000 When Autonomous Consumption