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4. Suppose that consumption C is the following function of disposable income YD C = 200...

4. Suppose that consumption C is the following function of disposable income YD C = 200 + 0:8YD (a) What are the marginal propensities to consume and save (MPC and MPS)? (b) Graph the consumption function and the 45 degree line. (c) Solve for saving or dissaving at levels of disposable income 300, 900, and 1300. (d) Find the level of disposable income where savings equals zero.

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Answer #1

(a) The marginal propensity to consume of this consumption function is given by 0.8, the marginal propensity to save is given by 0.2. Thus if income rises by $100, then consumption rises by $80.

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