Calculate the Marginal Propensity to Consume and the Marginal ...

Question

Calculate the Marginal Propensity to Consume and the Marginal Propensity to Save using the following table:

Table showing disposable income, consumption, savings, MPC, and MPS for calculating consumption functions.

Accepted Answer

All right. So let's get some practice here. Let's see how you did. So what we have here, calculate the marginal propensity to consume and the marginal propensity to save using the following table. So what are we given here? We're given levels of disposable income and levels of consumption. So it asks us to solve for savings, MPC, and MPS. Well, it's easy to solve for savings if you know disposable income and consumption, right? The savings is the difference between the two because disposable income, it's either used for consumption or for savings. So when we think about disposable income, we'll say YD, it's either going to use for consumption or savings, right? So naturally, if we subtract C from both sides, well then YD minus c equals savings, right? So we just have to subtract the consumption from the disposable income and we will get, the level of savings. So 18,000 minuteus 16,000 well, we consumed 16,000 but we saved 2,000 of it there. Right? Now what about let's just do all the savings since that's just easy subtraction here. So when we have a disposable income of 20,000, well, we're consuming 17,200. 28100 being saved. So that's the the difference between the 2. And what about the next one? 22,000 minus 18,400. That tells us we're saving 36100. And the next one, 20 4,000 minus 19.6 19,600 is 4,400 and finally, at a level of 26,000 in disposable income, we're consuming 20,800 leaving us with 5,200 in savings. So notice as our disposable income goes up, our consumption goes up and our savings goes up and this has to do with the marginal propensity to consume as we have more income, how much more are we going to consume and the marginal propensity to save as we have more income, how much are we likely to save. So remember, when we're dealing with marginal, we have to think about the change in income and the change in consumption and savings. So when we calculate the marginal propensity to consume, we have to think about how much has it changed. So in this first case, we're not going to do anything because there's no change but let's think about when we change from 18,000 to 20,000. So remember marginal propensity to consume, that was the change in consumption divided by the change in disposable income, right? So, in this case, what was our change in consumption? Well, we were at 16,000 and we went up to 17,200. So our consumption went up by 1200, right? 17,200 minus $$16,000 Our consumption went up by 1200 $$And what about our disposable income? We were at $$18,000 and now we're at 20$$,000 dollars Our disposable income went up by 2,000, right? $$12,000 divided by 2,000. Well, that comes out to 0 point 6, right? So what does that tell us? In this case, that as we get an extra dollar of disposable income, what we're going to consume 60¢ more, right? So what do you think is going to follow? Can you by knowing that, do you know what the marginal propensity to save is going to be? Remember that the marginal propensity to consume plus the marginal propensity to save is equal to 1, right? Because we're either going to consume or save. So naturally, I would expect it to equal 0.4. But let's go ahead and calculate it just in case. So our savings here, remember, marginal propensity to save is the change in savings over the change in disposable income. How much are we going to save when we have some extra disposable income? So in this case, our savings went up from 2,000 to 2,800. We have an extra 800 of $$savings and the same thing on the bottom, right? We're still dealing with an extra 2,000 of disposable income. So 800 divided by 2,000, well, guess what? It equals 0.4. So it follows 0.6 plus 0.4, it equals 1. Right? That's all of our change in disposable income either went to consumption or savings. So as we go down, we should expect since we're dealing with consumption functions that are linear at least in this class, we deal with them that are linear. We should expect it it to stay constant here. So let's see what happens. Again, we see that our disposable income in each of these cases is going up by 2,000, right? 20,000 to 22,000, 24,000. It's always going up by 2,000. So in the next one, we're going to have 2,000 in the denominator and what about our consumption? It went up by 1200 again. Right? So 1200 divided by 2,000, again we get 0.6. And what about savings? Again, it went up by 800, right? So our change in savings was 800 and our disposable income changed by 2,000. So it holds constant here. This means that we're probably dealing with a line, a consumption function that's a line. We've got a constant marginal propensity to consume and as we go down, we're going to see the same thing, right? It changed by 1200 again our consumption from $$19,600 from 18$$,400 to $$19,600 that was an extra 1200 $$disposable income went up by 2 1,000, 0.6 again. And the same thing here, 800 divided by 2,000 we're going to get 0.4. And finally in the last one, same thing again, consumption went up by 1200, 0.6. And finally, 800 more in savings from 4,400 to 5,200 divided by the 2,000 and we get 0.4. Cool. So what did we see here? We've got a constant marginal propensity to consume of 0.6. Every dollar of extra disposable income, we spend 60¢ on consumption and we save the rest 40¢. Cool? Alright. Let's go ahead and move on to the next video.

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