Question

A hypothetical economy's consumption schedule is given in the table below.

GDP=DI	C
6600	6680
6800	6840
7000	7000
7200	7160
7400	7320
7600	7480
7800	7640
8000	7800

Use the information to answer the following:

1. If disposable income were $7400, how much would be saved?

2. What is the "break-even" level of disposable income?

3. What is this economy's marginal propensity to consume?

4. What is the average propensity to consume when disposable income is $7000? When disposable income is $8000?

Answer 1

a)

at DI = 7400

C = 7320

S = DI - C

= 7400 - 7320

= 80

b)

break even level occures where C = Y (DI)

So at DI = 7000

C = 7000

so DI = C = 7000 is the break even level of DI

c)

MPC = C/DI(Y)

Y = GDP = DI	C	Y	C	MPC
6600	6680
6800	6840	200	160	0.8
7000	7000	200	160	0.8
7200	7160	200	160	0.8
7400	7320	200	160	0.8
7600	7480	200	160	0.8
7800	7640	200	160	0.8
8000	7800	200	160	0.8

So MPC = 0.8  

d)

APC = C/DI

at Y = DI = 7000

APC = 7000/7000

= 1

At Y = DI = 8000

APC = 7800/8000

= 0.975