Question

Suppose a family's annual income is $58,000; if the marginal propensity to save (MPS) is 0.25,...

Suppose a family's annual income is $58,000; if the marginal propensity to save (MPS) is 0.25, and the income for the family decreases by $15,000, then the decrease in consumption will be Select one:

a. $3,750.

b. $10,500.

c. $11,250.

d. $1,500.

Homework Answers

Answer #1

Option C.

  • Given that the annual income of a family = $58000 and the marginal propensity to save = 0.25.
  • If the income 1 decreases to income 2 = $15,000, then we can see a decrease in the consumption which can be calculated as follows.

MPS = 1-MPC = 1-0.25 = 0.75.

  • Decrease in consumption is given by,   

Change in consumption ÷ Change in income.

That is, MPC = (C2 - C1) ÷ (Income 2 - Income 1)

0.75 = (C2 - C1) ÷ $15,000

(C2 - C1) = $15,000 * 0.75

= $11,250.//

Hence the decrease in consumption will be $11,250.

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