Question

Suppose Nicole’s yearly income is $5,000 when she is fifteen, $35,000 when she is twenty five, and $70,000 when she is fifty (these are all present value measures of future income). Assume that Nicole’s autonomous consumption expenditure is $20,000 and that her marginal propensity to consume is 0.75. i. Plot Nicole’s consumption function (measure income on the horizontal axis and consumption on the vertical axis) for every point in her life. Plot Nicole’s consumption function if her autonomous consumption expenditure decreases to $15,000. ii. Calculate Nicole’s average propensity to consume when she is fifteen, twenty-five, and fifty (assuming autonomous consumption is $20,000).

Answer 1

Y( Income)	C1 ( When Autonomous Consumption = $20000)	C2 ( When Autonomous Consumption = $15000)
5000	23750	18750
35000	46250	41250
70000	72500	67500
C1 = 20000 + 0.75Y
C2 = 15000 + 0.75Y
b) APC = C1/Y
Y( Income)	APC
5000	4.8
35000	1.3
70000	1.0

Red line shows Consumption when autonomous consumption is $15000 and Blue line shows consumption when autonomous consumption is $20000.