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Explain how the consumption function links consumer spending and current income. Do you think this is...

Explain how the consumption function links consumer spending and current income. Do you think this is a reasonable explanation of consumer spending?

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Answer #1

Consumption function-

C= Cconstant + mpc*Y

Cconstant is autonomous consumption spending, that is consumption when income is 0.

There is a positive relationship between consumption spending and current income. If income or Y rises by 1 unit consumption spending, C increases by mpc*1 unit.

mpc is the marginal propensity to consume which is the change in consumption divided by change in current income.

I think this is a reasonable explanation of consumer spending. Even when income is 0 people consume something to stay alive either through borrowing or dissaving.

Consumption spending and current income are positively related and slope is mpc, that is part of income is consumed and other part is saved.

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