Assuming for an imaginary economy, consumption at zero level of income and break-even level of income is ₹ 50 and ₹ 200 respectively.
Choose the correct value of Marginal Propensity to Consume (MPC), from the following :
Assuming for an imaginary economy, consumption at zero level of income and break-even level of income is ₹ 50 and ₹ 200 respectively.
Choose the correct value of Marginal Propensity to Consume (MPC), from the following :
Show Hint
- 0.8
- 0.9
- 0.75
- 0.85
The Correct Option is C
Solution and Explanation
A linear consumption function is C = a + cY. Here a is the autonomous consumption and c is the MPC.
Consumption at zero income is Rs. 50, so a = 50.
Step 2: Use the break-even condition:
At the break-even income, consumption is equal to income. So C = Y = Rs. 200.
Put these in the function: 200 = 50 + c x 200.
Step 3: Solve for MPC:
200 - 50 = 200c, so 150 = 200c.
c = 150 / 200 = 0.75. So MPC = 0.75.
Step 4: Why the other options are wrong:
(A) 0.8 would give C = 50 + 0.8 x 200 = 210, which is more than the income of 200.
(B) 0.9 would give C = 50 + 0.9 x 200 = 230, which is not equal to 200.
(D) 0.85 would give C = 50 + 0.85 x 200 = 220, which is not equal to 200.
Final Answer:
MPC = 0.75, option (C).
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