Chapter 10, Problem 1DQ

To determine

MPC and APC.

Explanation of Solution

MPC is associated to the changes that occur in income and spending. Hence, MPC is calculated by

$\text{MPC}=\frac{\text{Change in consumption}}{\text{Chnage in income}}$

However, in the case of APC, it is an average where the total amount spent on consumption is compared to the total income earned. Hence, it is calculated as follows:

$\text{APC}=\frac{\text{Total spending on consumption}}{\text{Total income}}$

When there is in increase in the income, two choices available are either to spend or to save the money. As MPC is associated to changes on spent income, the amount that is not spent will have to be saved and this becomes MPS. So, the numerator will have change in the money spent or saved and when added together it has to be the total change in income. So, the denominator will have the total change in income. One will be the result when adding MPS and MPC.

Economics Concept Introduction

Concept Introduction:

Marginal propensity to consume: Marginal propensity to consume refers to the sensitivity of change in the consumption level due to changes occurred in the income level.

Marginal propensity to save (MPS): Marginal propensity to save refers to the sensitivity of change in the saving level due to changes occurred in the income level.