Chapter 10, Problem 3P

Subpart (a):

To determine

MPC.

Explanation of Solution

The slope of the linear equation is the MPC; here, it is equal to 0.8. Thus, MPC is 0.8.

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.

Subpart (b):

To determine

MPS.

Explanation of Solution

The MPS is evaluated as follows:

$\begin{array}{l}\text{Marginal propensity to save}=\text{1-Slope of the linear equation}\\ =\text{1-0}\text{.8}\\ =\text{0}\text{.2}\end{array}$

Thus, MPS is 0.2.

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.

Subpart (c):

To determine

Consumption.

Explanation of Solution

Consumption can be calculated as follows:

$\begin{array}{l}\text{Level of consumption}=\left(\begin{array}{l}\text{\$40}+\text{Slope of }\\ \text{linear equation}\end{array}\right)\times \text{Income}\\ =\left(\text{\$40}+\text{0}\text{.8}\right)\times \$400\\ =\text{\$360}\end{array}$

Total consumption is $360.

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.

Subpart (d):

To determine

APC.

Explanation of Solution

The average propensity to consume (APC) is evaluated as follows:

$\begin{array}{l}\text{Average propensity to consume}=\frac{\text{Consumption}}{\text{Income}}\\ =\frac{\text{\$360}}{\text{\$400}}\\ =\text{0}\text{.9}\end{array}$

Average propensity to consume is 0.9.

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.

Subpart (e):

To determine

Level of saving.

Explanation of Solution

The level of saving can be evaluated as follows:

$\begin{array}{l}\text{Level of saving}=\text{Income-Consumption}\\ =\text{\$400-\$360}\\ =\text{\$40}\end{array}$

Total saving is $40.

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.

Subpart (f):

To determine

APS.

Explanation of Solution

The average propensity to saving (APS) is evaluated as follows:

$\begin{array}{l}\text{Average propensity to save}=\frac{\text{Saving}}{\text{Income}}\\ =\frac{\text{\$40}}{\text{\$400}}\\ =\text{0}\text{.1}\end{array}$

Average propensity to save is 0.1.

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.