Monday 19 October 1998
If when Jenny's income increases from $16,000 to $20,000, her consumption spending goes from $15,000 to $18,000, her marginal propensity to consume is?
Marginal propensity to consume is, by definition, the change in consumption spending divided by the change in income which caused it; or in other words, the fraction of each extra dollar of income spent on consumption. So in this case,
Change in consumption = $18,000 - $15,000 = $3,000
Change in income = $20,000 - $16,000 = $4,000
MPC = marginal propensity to consume = 3,000/4,000 = 3/4 = 0.75