Assume that Jane's marginal propensity to consume equals 0.8, and that in 2004 Jane spent $36,000 from her disposable income of $40,000. If her disposable income in 2005 increased to $50,000, her consumption spending increased by:

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Hudson Arellano

30 December, 04:23

Assume that Jane's marginal propensity to consume equals 0.8, and that in 2004 Jane spent $36,000 from her disposable income of $40,000. If her disposable income in 2005 increased to $50,000, her consumption spending increased by:

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Aditya Henderson · Answer 1

First we need to find the increase in her disposable income by subtracting the old disposable income from the new disposable income.

Old Disposable income = 40,000

New disposable income = 50,000

Change in disposable income = 50,000-40,000 = 10,000

Although her mpc is 0.8 we need to find out what proportion of her disposable income does she spend on consumption.

So her disposable income was 40,000 and consumption was 36,000

36,000/40,000 = 0.9

This means that Jane spends 90% of her dispoasble income on consumption, so if her disposable income increase by 10,000 her increase in consumption was

0.9*10,000 = 9,000

Increase in consumption = $9,000