Question

Suppose Leon had an income of $95,000 last year, out of which he spends $78,000. This...

Suppose Leon had an income of $95,000 last year, out of which he spends $78,000. This year he is unemployed and receives unemployment benefits of $30,000 out of which he spends $30,000. What’s his marginal propensity to consume (MPC)?

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Answer #1

Answer :) The marginal propensity to consume (MPC) of Leon is 0.75.

The formula to derive MPC is equal to Change in spending (or consumption) / Change in income.

MPC = ΔC/ΔY

MPC of the consumer varies depending upon his income. It is widely known that MPC of a person with higher income is lower while, a person with lower income has higher MPC. This is due to the fact that a person with higher income has normally met his consumption requirements and tend to save the additional income. While, for lower income consumer, the MPC is higher as it needs to satisfy his consumption requirements yet thus, his savings are lower and spending is higher.

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