Question

Calculate Marginal Propensity to Consume from the following data about an economy which is in equilibrium:
National income = Rs. 2,000
Autonomous consumption expenditure = Rs. 200
Investment expenditure = Rs. 100
(Marginal Propensity to Consume = 0.85)

Answer 1

Consumption Function, C = 200+ b Y where Y in the income in the economy and b= marginal propensity to consume.

At equilibrium level of output,

AS=AD

Y= C+I

=> 2,000 = 200 + b (2,000) + 100

=> 2,000 = 300+ 2,000 b

=> 2,000 b = 2,000 - 300

=> b = 1,700/ 2,000 = 0.85.