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14 February, 12:19

Advanced Analysis) Suppose that the linear equation for consumption in a hypothetical economy is:

C = 40 + 0.8Y

Also suppose that income (Y) is $400. Determine the values for the following: MPC, MPS, C (consumption), APC, S (savings), APS

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  1. 14 February, 16:18
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    0.8; 0.2; $360; 90%; 10%

    Explanation:

    Linear equation for consumption is as follows:

    C = 40 + 0.8Y

    suppose that income (Y) = $400

    MPC = 0.8

    Marginal propensity to save = 1 - Marginal propensity to consume

    MPS = 1 - 0.8

    = 0.2

    C = 40 + 0.8Y

    C = 40 + 0.8 * 400

    = $360

    Therefore, consumption is $360.

    Average propensity to consume (APC):

    = Consumption : Income level

    = 360 : 400

    = 0.9

    = 90%

    We know that income is either consumed or saved, therefore,

    Y = C + S

    $400 = $360 + S

    S = $40

    Average propensity to save (APS):

    = Savings : Income level

    = 40 : 400

    = 0.1

    = 10%
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