What is consumption function?Suppose the consumption function of a society is as follows: C=100+0.85Y, where C=Total consumption expenditure and Y=Disposable income.
Answer the following questions:
a.What is the autonomous consumption?
b.What is the total consumption when disposable income is 5000?
c.What is induced consumption when disposable income is 8000?
d.Find MPS .Prove that MPC+MPS=1
Consumption function is a single mathematical function used to express consumer spending and could be written as follows: C = A + MPC * D where C = Consumer spending A = Autonomous consumption, or the level of consumption that would still exist even if income was $0 MPC = Marginal propensity to consume, which is the ratio of consumption changes to income changes D = Real disposable income a. So, autonomous consumption = A = 100 b. C=100+0.85Y = 100+0.85 * 5000 = 4350 c. Induced consumption is household consumption that varies with income = MPC * D = 0.85 * 8000 = 6800 d. MPC+MPS=1 MPS = 1 – MPC = 1 – 0.85 = 0.15 We can prove it: If Yd = C + S, then any change in Yd must resolve a change in C and some part a change in S. So we can write: ΔYd = ΔC + ΔS If we divide both sides by ΔYd, and we get: 1 = MPC + MPS