Question

PLEASE EXPLAIN

If income rises from $10,000 to $15,000 and consumption increases from $9,000 to $12,000, then MPC is ____

A.) .5

B.) .6

C.) .7

D.) .8

Answer 1

MPC is the marginal propensity to consume. It indicates the change in consumption due to a change in income. In other words it's the the change in consumption due to change of income by $1. Mathematically if we write this - it's dC/dY. dC= C2-C1 (change in consumption) while. dY= Y2-Y1 (change in income)

We can use this formula to calculate the mpc.

dC= 12000-9000 = 3000

dY= 15000-10000 = 5000

So mpc = 3000/5000 =3/5 = 0.6 (This is option B)

Hence option B is correct. From the calculations we can conclude that other options are incorrect.