Total consumption is $3,680 when income is $4,000, and then total income increases to $5,520 when income rises to $6,000. Calculate the value of the marginal propensity to save. (State your answer in hundredths, such as 0.21, for example.)
Question
Total consumption is 4,000, and then total income increases to 6,000. Calculate the value of the marginal propensity to save. (State your answer in hundredths, such as 0.21, for example.)
Solution
To calculate the marginal propensity to save, we first need to understand what it is. The marginal propensity to save (MPS) is the proportion of an increase in income that a person saves rather than spends on consumption. It is calculated as the change in savings divided by the change in income.
From the problem, we know that when income was 3,680. This means that savings at this income level was 3,680 = $320.
When income increased to 5,520. So, savings at this income level was 5,520 = $480.
The change in savings is therefore 320 = 6,000 - 2,000.
So, the marginal propensity to save (MPS) is the change in savings divided by the change in income, which is 2,000 = 0.08.
So, the value of the marginal propensity to save is 0.08.
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