Find consumption when $¯ C = 100,$ MPC = 0.5 and Y = 2,000. Is there is greater increase in income as compared to consumption when income changes to 2,500?

Consumption = 1,350
Yes

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Consumption = 1,350
No

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Consumption = 1,150
No

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Consumption = 1,150
Yes

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Solution

The correct option is A
Consumption = 1,350
Yes

We know that,

$C = ¯ C + M P C (Y)$

When Y = 2,000, $C = 100 + 0.5 (2, 000)$

$= 100 + 1, 000$

$= 1, 100$

We also know that,

Y = C + S

Or, S = Y - C

= 2,000 - 1,100 = 900

$∴$ Consumption = 1,100

Saving = 900

When Y = 2,500

C = 100 + 0.5(2,500)

= 100 + 1,250 = 1,350

Change in C = 1,350 - 1,100 = 250

Change in Y = 2,500 - 2,000 = 500

Yes, income is greater than the increase in consumption when Y increases from 2,000 to 2,500.

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Find consumption when ¯C=100, MPC = 0.5 and Y = 2,000. Is there is greater increase in income as compared to consumption when income changes to 2,500?

Find consumption when $¯ C = 100,$ MPC = 0.5 and Y = 2,000. Is there is greater increase in income as compared to consumption when income changes to 2,500?