Question

Calculate Marginal Propensity to consume from the following:
(i) Consumption expenditure at zero income Rs. 70
(ii) Equilibrium income Rs.700
(iii) Investment Rs. 140
(Marginal Propensity to Consume = 0.7)

Answer 1

The Consumption Function is C = 70+ 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

=> 700 = 70 + b (700) + 140

=> 700 = 210+ 700 b

=> 700 b = 700 - 210

=> b = 490/700 = 0.7.