Question

Calculate Marginal Propensity to Consume from the following:
(i) Equilibrium income Rs. 350
(ii) Consumption expenditure at zero income Rs. 20
(iii) Investment Rs. 50

Answer 1

Consumption Function, C = 20+ 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

=> 350 = 20 + b (350) + 50

=> 350 = 70+ 350 b

=> 350 b = 350 - 70

=> b = 280/ 350 = 0.8.