Question

Which of the following statements is incorrect about marginal and average propensity to save?

• A. Value of marginal propensity to save ranges from 0 to 1
• B. The sum of average propensity to save and marginal propensity to save is always equal to one
• C. At the break-even point, income and consumption are equal
• D. Value of average propensity to save rises with increase in income

Answer 1

The Correct Option is B

In economics, the concepts of marginal propensity to save (MPS) and average propensity to save (APS) play a crucial role in understanding how individuals allocate their income between saving and consumption. Let's clarify these concepts and explain why the given statement is incorrect: 

1. Marginal Propensity to Save (MPS): This is the fraction of an additional unit of income that is saved rather than consumed. Its value ranges from 0 to 1, as some portion of additional income is either consumed or saved.
2. Average Propensity to Save (APS): This is the total savings to total income ratio. It tends to increase with an increase in income since a larger proportion of income can be allocated to savings as basic consumption needs are met.
3. Break-even Point: At this point, income and consumption levels are equal, meaning savings are zero.
4. Incorrect Statement Explanation: The statement "The sum of average propensity to save and marginal propensity to save is always equal to one" is incorrect. In reality, the sum of the average propensity to consume (APC) and APS can differ from one. What equals one is the sum of the marginal propensity to consume (MPC) and MPS, as income is either consumed or saved.

Concept	Formula	Range
MPS	\( \frac{\Delta S}{\Delta Y} \)	0 to 1
APS	\( \frac{S}{Y} \)	Can rise with income
MPC + MPS	= 1	Always

Thus, the assertion that the sum of APS and MPS always equals one is incorrect, making it the correct answer choice for the question.

Answer 2

The sum of APS and MPS is not always equal to one. Instead, the correct relationship is:

APS + APC = 1, or MPS + MPC = 1.

Here, APS refers to the Average Propensity to Save, and MPS refers to the Marginal Propensity to Save. Similarly, APC and MPC are their consumption counterparts, Average Propensity to Consume and Marginal Propensity to Consume, respectively.

The relationship highlights the concept that all income in an economy is either consumed or saved. Therefore, the sum of the propensities to consume and save, whether average or marginal, must always equal one, reflecting the division of income between consumption and saving.