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The income of an individual increases from N150 to N250 and his consumption rate...


Question

The income of an individual increases from N150 to N250 and his consumption rate increases from N100 to N150. Calculate the Marginal Propensity to Consume

Options

A)
2
B)
0.4
C)
1
D)
0.5

The correct answer is D.

Explanation:

The Marginal Propensity to Consume (MPC) is the additional amount consumed as a fraction of additional disposable income.
Initial income = N150.
New income = N250.
Change in income = N250 – N150 = 100
Initial consumption = N100
New consumption = N150.
Change in consumption = N150 - N100 = N50.
MPC = Change in consumption ÷ Change in income .
= 50/100 = ½
MPC = 0.5

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Dicussion (1)

  • The Marginal Propensity to Consume (MPC) is the additional amount consumed as a fraction of additional disposable income.
    Initial income = N150.
    New income = N250.
    Change in income = N250 – N150 = 100
    Initial consumption = N100
    New consumption = N150.
    Change in consumption = N150 - N100 = N50.
    MPC = Change in consumption ÷ Change in income .
    = 50/100 = ½
    MPC = 0.5