Question

Distinguish between marginal propensity to consume and average propensity to consume. Give a numerical example.

Answer 1

Marginal Propensity Consume	Average Propensity to Consume
Ratio of change in consumption expenditure to change in disposable income	Ratio of consumption expenditure to level of income
Algebraically, $MPC=c=\frac{\Delta C}{\Delta Y_d}$	Algebraically, $APC=\frac{C}{Y}$

Example: Consider the following information and calculate $MPC$ and $APC$

$Y=Rs.1,000$
$\Delta Y_d=Rs.500$
$C=Rs.800$
$\Delta C=Rs.200$
$APC=\frac{C}{Y}=\frac{800}{1000}=0.80$ or $80\%$
$MPC=c=\frac{\Delta C}{\Delta Y_d}$
$=\frac{200}{500}=0.4$