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Question

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?


  1. Consumption = 1,150
    No

  2. Consumption = 1,350
    Yes

  3. Consumption = 1,150
    Yes

  4. Consumption = 1,350
    No


Solution

The correct option is B

Consumption = 1,350
Yes


We know that,   

                                C=¯C+MPC(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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