Question 15: Calculating Marginal Propensity to Consume
If disposable income increases by $500 million, and consumption increases by $400 million, then what is the marginal propensity to consume?
The marginal propensity to consume (MPC) is a vital concept in economics that helps us understand how consumers allocate their additional income towards spending. In this scenario, where disposable income increases by $500 million and consumption increases by $400 million, the MPC can be calculated as follows: MPC = Change in Consumption / Change in Disposable Income Given that consumption increased by $400 million and disposable income increased by $500 million, we can plug in the values: MPC = $400 million / $500 million = 0.8 Therefore, the marginal propensity to consume in this situation is 0.8. This means that for every additional dollar of disposable income, individuals, on average, will spend 80 cents. A high MPC indicates that a significant portion of any increase in income is spent rather than saved.Understanding Marginal Propensity to Consume (MPC)