
Sub part (a):
Consumption schedule and marginal propensity to consume.
Sub part (a):

Explanation of Solution
Table -1 shows the consumption schedule:
Table -1
| Consumption |
100 | 120 |
200 | 200 |
300 | 280 |
400 | 360 |
500 | 440 |
600 | 520 |
700 | 600 |
Figure 1 illustrates the level of consumption at different level of gross domestic product (GDP).
In Figure 1, the horizontal axis measures the gross domestic output and the vertical axis measures the consumption level.
Size of marginal propensity to consume (MPC) can be calculated as follows.
The size of marginal propensity to consume is 0.8.
Concept introduction:
Consumption schedule: Consumption schedule refers to the quantity of consumption at different levels of income.
Marginal propensity to consume (MPS): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Sub part (b):
Disposable income, tax rate, consumption schedule, marginal propensity to consume and multiplier.
Sub part (b):

Explanation of Solution
Disposable income (DI) can be calculated by using the following formula.
Substitute the respective values in Equation (1) to calculate the disposable income at the level of GDP $100.
Disposable income at the level of GDP $100 is $90.
Tax rate can be calculated by using the following formula.
Substitute the respective values in Equation (2) to calculate the tax rate at the level of GDP $100.
Tax rate at the level of GDP is 10%.
New consumption level can be calculated by using the following formula.
Substitute the respective values in Equation (3) to calculate the disposable income at the level of GDP $100. Since, the tax payment is equal amount of decrease in consumption for all the levels of GDP. The decreasing consumption for increasing $10 is assumed to be $8.
New consumption is $112.
Table -2 shows the values of disposable income, new consumption level after tax and the tax rate that are obtained by using Equations (1), (2) and (3).
Table -2
Gross domestic product | Tax | DI | New consumption | Tax rate |
100 | 10 | 90 | 112 | 10% |
200 | 10 | 190 | 192 | 5% |
300 | 10 | 290 | 272 | 3.33% |
400 | 10 | 390 | 352 | 2.5% |
500 | 10 | 490 | 432 | 2% |
600 | 10 | 590 | 512 | 1.67% |
700 | 10 | 690 | 592 | 1.43% |
Size of marginal propensity to consume (MPC) can be calculated as follows.
The size of marginal propensity to consume is 0.8.
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption, at a constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save. Multiplier can be evaluated using the following formula:
Since the value of MPC remains the same for part (a) and part (b), there is no change in the value of multiplier. The value of multiplier is 5
Figure -2 illustrates the level of consumption at different level of gross domestic product (GDP) for lump sum tax (Regressive tax).
In Figure -2, the horizontal axis measures the gross domestic output and the vertical axis measures the consumption level.
Concept introduction:
Consumption schedule: Consumption schedule refers to the quantity of consumption at different levels of income.
Marginal propensity to consume (MPS): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.
Sub part (c):
Tax amount, consumption schedule, marginal propensity to consume and multiplier.
Sub part (c):

Explanation of Solution
Tax amount can be calculated by using the following formula.
Substitute the respective values in Equation (4) to calculate the tax amount at $100 GDP.
Tax amount is $10.
Table -3 shows the values of disposable income, new consumption level after tax and the tax rate that are obtained by using Equations (1), (2), (3) and (4). The change in tax amount is differing for different levels of GDP. The decreasing consumption for increasing each $10 is assumed to be $8 (Thus, if the tax payment is $30, then the consumption decreases by $24
Table -3
Gross domestic product | Tax | DI | New consumption | Tax rate |
100 | 10 | 90 | 112 | 10% |
200 | 20 | 180 | 184 | 10% |
300 | 30 | 270 | 256 | 10% |
400 | 40 | 360 | 328 | 10% |
500 | 50 | 450 | 400 | 10% |
600 | 60 | 540 | 472 | 10% |
700 | 70 | 630 | 544 | 10% |
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption, at a constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save. Multiplier can be evaluated using the following formula:
Since the value of MPC different for part (a) and part (c), the value of multiplier for both the part is different. The value of multiplier is 3.57
Figure -3 illustrates the level of consumption at different level of gross domestic product (GDP) for proportional tax.
In Figure -3, the horizontal axis measures the gross domestic output and the vertical axis measures the consumption level.
Concept introduction:
Consumption schedule: Consumption schedule refers to the quantity of consumption at different levels of income.
Marginal propensity to consume (MPS): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.
Sub part (d):
consumption schedule, marginal propensity to consume and multiplier.
Sub part (d):

Explanation of Solution
Marginal propensity to consume can be calculated by using the following formula.
Substitute the respective values in Equation (5) to calculate the MPC at $100 GDP.
The value of MPC is 0.72.
Table -4 shows the values of disposable income, new consumption level after tax and the tax rate that are obtained by using Equations (1), (2), (3), (4) and (5). The change in tax amount is differing for different levels of GDP. The decreasing consumption for increasing each $10 is assumed to be $8 (Thus, if the tax payment is $20, then the consumption decreases by $16
Table -3
Gross domestic product | Tax | DI | New consumption | Tax rate | MPC |
100 | 0 | 100 | 120 | 0% | |
200 | 10 | 190 | 192 | 5% | 0.8 |
300 | 30 | 270 | 256 | 10% | 0.64 |
400 | 60 | 340 | 312 | 15% | 0.56 |
500 | 100 | 400 | 360 | 20% | 0.48 |
600 | 150 | 450 | 400 | 25% | 0.4 |
700 | 210 | 490 | 432 | 30% | 0.32 |
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption, at a constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.
Multiplier value is differing for each level of GDP. When the tax rate increases, it reduces the value of MPC. Since the value of MPC decreases, the value of multiplier will also decrease.
Figure 4 illustrates the level of consumption at different level of gross domestic product (GDP) for progressive tax.
In Figure 4, the horizontal axis measures the gross domestic output and the vertical axis measures the consumption level.
Concept introduction:
Consumption schedule: Consumption schedule refers to the quantity of consumption at different levels of income.
Marginal propensity to consume (MPS): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.
Sup part (e):
Marginal propensity to consume and multiplier.
Sup part (e):

Explanation of Solution
Figure 1, Figure 2, Figure 3 and Figure 4 reveals that the proportional and progressive tax system reduces the value of MPC, so that the value of multiplier also decreases. The regressive tax system (Lump sum tax) does not alter the MPC. Since there is no change in the MPC, the multiplier remains the same.
Concept introduction:
Marginal propensity to consume (MPS): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Progressive tax: Progressive tax refers to the higher income people paying higher tax amount than the lower income people.
Proportional tax: Proportional tax rate refers to the fixed tax rate regardless of income and the tax rate and is the same for all levels of income.
Regressive tax: Regressive tax refers to the higher income people paying lower percentage of tax amount and lower income people paying higher percentage of tax amount.
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate. Multiplier is positively related to the marginal propensity to consumer and negatively related with the marginal propensity to save.
Want to see more full solutions like this?
Chapter 13 Solutions
Macroeconomics: Principles, Problems, & Policies
- A hospital charges $200 for a medical procedure, and 1,000 patients use the service. The hospital raises the price to $250, and the number of patients drops to 900. Calculate the price elasticity of demand (PED) and explain your answer. (show all working) Briefly explain how elasticity affects government health policies in the following cases: • Taxes on unhealthy products (cigarettes, alcohol, sugary drinks) • Subsidizing Preventive Care (e.g., vaccines, screenings) Drug Price Controls & Generic Substitutions Co-Payments & Insurance Designarrow_forwardAssume the United States is a large consumer of steel, able to influence the world price. DUS and SUS denote its demand and supply schedules in Figure 1. The overall (United States plus world) supply schedule of steel is denoted by SUS.+W. Figure 1 Import Tariff Levied by a Large Country Answer all questions (a-f) by referring to Figure 1 above. a) Calculate the free trade market equilibrium price, domestic consumption, and volumE Answer all questions (a-f) by referring to Figure 1 above. a) Calculate the free trade market equilibrium price, domestic consumption, and volume of steel imports by the US. [5 marks] b) Suppose the United States imposes a tariff (t) of $100 on each ton of steel imported. With the tariff, calculate the price of steel and the volume of steel imports by the US. [5 marks] c) Of the $100 tariff, how much is passed on to the US consumer via a higher price, and how much is borne by the foreign exporter? [5 marks] d) Calculate the tariff's deadweight welfare loss to…arrow_forward1. A doctor quits his job, which pays $77,000 per annum, to open a non-governmental organization (NGO) to serve the needs of orphans. His annual expenses for the NGO amounts to $62,700 for food and daily supplies, $9,400 for maintenance, and $1,800 for books. What is his opportunity cost of opening the NGO? (Show working) 2. During the COVID-19 pandemic, hospitals worldwide faced severe resource constraints, including: a. Limited ICU beds b. Shortage of ventilators c. Insufficient doctors and nurses d. Lack of vaccines in early 2021 Governments and hospitals had to make critical decisions about who receives treatment first and how to allocate limited resources efficiently. In no more than 150 words and using core economic concepts of scarcity, choice and opportunity cost, how would you help your government make these critical decisions?arrow_forward
- What is the argument about necessary evil?arrow_forwardWhat are the consequences of declining houses prices?arrow_forwardQ1 Explain what economic catch 22 is. Q2 What are the consequences of declining houses pricing? Q3 What is the argument about necessary evil? Q4 Explain the idea of irrational exhuberance? Q5 Explain what was the economic paradox?arrow_forward
- < Files 9:10 Fri Mar 21 Chapter+11-Public+Goods+and+Common+Res... The Economic Catch-22 By Robert J. Samuelson We are now in the "blame phase" of the economic cycle. As the housing slump deepens and financial markets swing erratically, we've embarked on the usual search for culprits. Who got us into this mess? Our investigations will doubtlessly reveal, as they already have, much wishful thinking and miscalculation. They will also find incompetence, predatory behavior and probably some criminality. But let me suggest that, though inevitable and necessary, this exercise is also simplistic and deceptive. -- business It assumes that, absent mistakes and misdeeds, we might remain in a permanent paradise of powerful income and wealth growth. The reality, I think, is that the economy follows its own Catch-22: By taking prosperity for granted, people perversely subvert prosperity. The more we managers, investors, consumers - think that economic growth is guaranteed and that risk and…arrow_forward2.) Using the line drawing tool, plot and label the isocost line. Carefully follow the instructions above, and only draw the required objects. FILL IN BLANK d. Now suppose the price of labour rises to $5 per unit, but the firm still wants to produce 500 tires per day. Explain how a cost-minimizing firm adjusts to this change (with no change in technology). A cost-minimizing firm will be producing on ▼ The samedifferently slopedparallel isocost line. The firm will use ▼ moresameless labour and ▼ less the same amount of more capital and produce on ▼ a higher point on the same a lower point on the same a lower a higher isoquant curve.arrow_forwardQK Using the graph on the right, determine how the firm should change the quantity of the production factors in order to reduce the costs. The firm that is producing at point A can reduce its costs for producing 2000 units by employing A. same capital and more labour. B. less capital and more labour. ○ C. less capital and the same labour. D. more capital and more labour. OE. more capital and less labour. C A B Q =4000 Q = 2000 C Isocost line QLarrow_forward
- PL Suppose the price ratio is the same along isocost PK lines A and B. In the figure at right, the difference between isocost line A and isocost line B is that A. the total cost is larger along B. B. the total cost is larger along A. OC. labour is relatively more expensive along A. ○ D. the level of output is lower along A. OE. both capital and labour are relatively cheaper along A. Capital B Labourarrow_forwardUsing the graph on the right, determine the per unit prices of capital and labour. 20- Given the information provided about the isocost lines, we know that the per unit price of capital is TC=$100 and the per unit price of labour is 16- TC $80 ○ A. $50; $20 ○ B. $2; $5 ○ C. $5; $2 ○ D. $20; $50 E. not determinable; not determinable Quantity of K 12 TC $60 TC $40 0 10 20 30 Quantity of L 40arrow_forwardThe diagram to the right contains isocost lines A and B. If the price of capital is the same for both lines, then the difference between isocost line A and isocost line B is that OA. the total cost is larger along B. B. the level of output is lower along A. C. both capital and labour are cheaper along A. OD. labour is more expensive along A. ○ E. labour is more expensive along B. Capital Labourarrow_forward
- Principles of Economics 2eEconomicsISBN:9781947172364Author:Steven A. Greenlaw; David ShapiroPublisher:OpenStaxEssentials of Economics (MindTap Course List)EconomicsISBN:9781337091992Author:N. Gregory MankiwPublisher:Cengage Learning
- Brief Principles of Macroeconomics (MindTap Cours...EconomicsISBN:9781337091985Author:N. Gregory MankiwPublisher:Cengage Learning




