Question
Find consumption when ¯C=100, MPC = 0.5 and Y = 2,000. Is there is greater increase in income as compared to consumption when income changes to 2,500?
Answer: Option A
:
A
We know that,
C=¯C+MPC(Y)
When Y = 2,000, C=100+0.5(2,000)
=100+1,000
=1,100
We also know that,
Y = C + S
Or, S = Y - C
= 2,000 - 1,100 = 900
∴ Consumption = 1,100
Saving = 900
When Y = 2,500
C = 100 + 0.5(2,500)
= 100 + 1,250 = 1,350
Change in C = 1,350 - 1,100 = 250
Change in Y= 2,500 - 2,000 = 500
Yes, income is greater than the increase in consumption when Y increases from 2,000 to 2,500.
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:
A
We know that,
C=¯C+MPC(Y)
When Y = 2,000, C=100+0.5(2,000)
=100+1,000
=1,100
We also know that,
Y = C + S
Or, S = Y - C
= 2,000 - 1,100 = 900
∴ Consumption = 1,100
Saving = 900
When Y = 2,500
C = 100 + 0.5(2,500)
= 100 + 1,250 = 1,350
Change in C = 1,350 - 1,100 = 250
Change in Y= 2,500 - 2,000 = 500
Yes, income is greater than the increase in consumption when Y increases from 2,000 to 2,500.
Was this answer helpful ?
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