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