Question

If national income is Rs. 90 crore and Consumption expenditure Rs. 81 crore, find out average propensity to save. When income rises tot 100 crore and consumption expenditure to Rs. 88 crore. What will be the marginal propensity to consume and marginal propensity to save?

Answer 1

APS refers to Average Propensity to save which defines the amount of savings in every 1 rupee of income for all level of income.

If Income= Rs. 90 crores and consumption = Rs. 81 crore, then savings = Rs. 9 crores.

APS= 9/90= 0.1.

If Income increases to Rs. 100 crores and consumption to Rs. 88 crore, then savings = Rs. 12 crores.

Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and corresponding change in consumption.

MPC= change in consumption / change in income = 7/10 = 0.7

Marginal Propensity to save refers to the percentage change in savings for every one rupee of change in the income. It is the ratio between the change in income and its corresponding change in savings.

MPS= change in savings / change in income= 3/10= 0.3