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A study determines that people spend $1000 per year, plus $0.75 for every dollar of their...

A study determines that people spend $1000 per year, plus $0.75 for every dollar of their income. Write the functional relationship as a formula. Determine which variable is dependent, and which is independent.

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Answer #1

1000 dollars are being spent every year irrespective of the income which means this is the autonomous consumption. Besides there is induced consumption which is 75% of each dollar earned. this is the marginal propensity to consume which indicates that whenever income is increased by $1 75% of this income will be spent

Consumption function is therefore C = 1000 + 0.75Y

The independent variable in this case is income (Y) and the dependent variable is C. This is because Y can take any values from zero to infinity but the value of C depends upon the value of independent variable Y.

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