Question

Income	C	APC	S	APS
0	?	--	?	--
100	?	?	?	?
200	?	?	?	?
300	?	?	?	?
400	410	?	?	?
500	500	?	?	?
600	590	?	?	?
700	680	?	?	?

Fill in the missing data wherever there is a question mark.                             (20 points)

2.Find the MPC and MPS for the above data. Show work!                               (10 points)

3.What is autonomous consumption in the above data? What is the formula for the consumption function in this specific case (use relevant numbers from #1)?     (20 points)

4.A firm expects to earn $14,000 a year on an $112,000 investment.

a)Calculate the expected profit rate. Show work                            (10 points)

b)This firm would be willing to make this investment provided the interest rate is lower than what?                                                                               (10 points)

Answer True or False for each of the following.        (3 points each)

When you buy 100 shares of IBM it is an investment according to economists.

If consumers have few durable goods, this will lower the C line, all other things equal.

A corporation is a legal person separate from the owners.

Investment is more stable than consumption.

Consumption is about 2/3 of overall spending each year in the US.

Net investment is gross investment minus depreciation.

High interest rates discourage business investment, all other things equal.

A bond holder is a part owner of a company.

High consumer debt would lower the C line, all other things equal.

Income is the largest determinant of consumption.

Answer 1

Income	C	APC	S	APS
0	50	--	-50	--
100	140	1.40	-40	-0.40
200	230	1.15	-30	-0.15
300	320	1.07	-20	-0.07
400	410	1.03	-10	-0.03
500	500	1.00	0	0.00
600	590	0.98	10	0.02
700	680	0.97	20	0.03

2.

MPC = Change in consumption due to the change in income

When income increases to 100,

Then

MPC = (140-50)/(100-0) = .9

MPC = .9

MPS = 1- MPC = 1-.9

MPS = .1

3.

Autonomous consumption = consumption that is independent of the income

Autonomous consumption (A) = 50

As per the data in the table of Q.1

Consumption = A + MPC*Y

Consumption = 50 + .9*Y

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