Question

4. [Marginal Propensity to Consume] Find the marginal propensity to consume (MPC = dC/dY) for each of the following consumption functions.

(a) C = C0 +bY, C0 = 1500, b = 0.6.

(b) C = 1200+0.75Yd, Yd = Y ?T, and T = 100.

(c) C = 2000+0.8Yd, Yd = Y ?T, and T = 300+0.1Y.

Answer 1

Given, mpc = dc/dy

(a)

C = 1500 + 0.6 Y

Differentiating both sides with respect to Y :

dC /dY = 0.6

So mpc = 0.6

(b)

C = 1200 + 0.75 ( Y - 100) = 1200 + 0.75Y - 75 = 1125 + 0.75Y

[putting Yd = Y-T = Y-100]

Now differentiating both sides with respect to Y :

dC/dY = 0.75

So, mpc = 0.75

(c)

C = 2000 + 0.8Yd = 2000 + 0.8 ( Y- (300+0.1Y) )

= 2000 + 0.8 ( Y - 300 - 0.1Y) = 2000 + 0.8 ( 0.9Y - 300)

= 2000 + 0.72Y - 300 = 1700 + 0.75Y

Now differentiating both sides with respect Y :

dC/dY = 0.75

So, mpc = 0.75

NOTE :