If Disposable Income Increases by $100 Million, What is the Marginal Propensity to Consume?

Question:

If disposable income increases by $100 million, and consumption increases by $90 million, then what is the marginal propensity to consume?

Answer:

The marginal propensity to consume (MPC) in this scenario is 0.9.

Explanation:

Marginal Propensity to Consume (MPC):

The marginal propensity to consume is the ratio of the change in consumption to the change in disposable income. It reflects the percentage of additional income that individuals spend on consumption.

Calculation:

Given data:

Change in disposable income = $100 million

Change in consumption = $90 million

To calculate the MPC, we use the formula:

MPC = Change in consumption / Change in disposable income

Substitute the values:

MPC = $90 million / $100 million = 0.9

Therefore, the marginal propensity to consume is 0.9. This means that for every additional dollar of disposable income, 90 cents will be spent on consumption.

In conclusion, if disposable income increases by $100 million, and consumption increases by $90 million, then the marginal propensity to consume is 0.9.