Consider the following consumption function:C=100+0.6YWhat is the marginal propensity to consume?
Question
Consider the following consumption function:C=100+0.6YWhat is the marginal propensity to consume?
Solution
The marginal propensity to consume (MPC) is the increase in consumer spending due to an increase in income. This can be calculated from the consumption function, which in this case is C = 100 + 0.6Y.
In this function, 'C' represents consumption and 'Y' represents income. The coefficient of Y (0.6 in this case) is the marginal propensity to consume. This means that for every additional dollar of income, consumption will increase by 60 cents.
So, the marginal propensity to consume in this case is 0.6.
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