Question

If consumption in period 1 is 650 and income is 700, and the same for period 2 stands at 700 and 800 respectively, find MPC.
(a) \[0.3\]
(b) \[0.4\]
(c) \[0.5\]
(d) \[0.6\]

Answer 1

Hint: Here, we need to find the MPC or the marginal propensity to consume. We will find the change in income and consumption from period 1 to period 2. Then, we will use the formula for the marginal propensity to consume to calculate the required MPC and find the correct option.

Formula used:
The marginal propensity to consume is given by the formula \[MPC = \dfrac{{\Delta C}}{{\Delta Y}}\], where \[\Delta C\] is the change in consumption and \[\Delta Y\] is the change in income.

Complete step by step solution:
First, we will find the change in consumption from period 1 to period 2.
The change in consumption is denoted by \[\Delta C\].
The change in consumption is equal to the difference in the consumption of the two periods.
Subtracting 650 from 700, we get
\[\begin{array}{l}\Delta C = 700 - 650\\ \Rightarrow \Delta C = 50\end{array}\]
Thus, we get the change in consumption as 50.
Next, we will find the change in income from period 1 to period 2.
The change in income is denoted by \[\Delta Y\].
The change in income is equal to the difference in the income of the two periods.
Subtracting 700 from 800, we get
\[\begin{array}{l}\Delta Y = 800 - 700\\ \Rightarrow \Delta Y = 100\end{array}\]
Thus, we get the change in income as 100.
Finally, we will calculate the MPC, that is the marginal propensity to consume.
The marginal propensity to consume is given by the formula \[MPC = \dfrac{{\Delta C}}{{\Delta Y}}\], where \[\Delta C\] is the change in consumption and \[\Delta Y\] is the change in income.
Substituting \[\Delta C = 50\] and \[\Delta Y = 100\] in the formula for MPC, we get
\[ \Rightarrow MPC = \dfrac{{50}}{{100}}\]
Simplifying the fraction, we get
\[\therefore MPC=0.5\]
Therefore, we get the MPC as \[0.5\].

Thus, the correct option is option (c).

Note:
We calculated the marginal propensity to consume in the solution. The marginal propensity to consume is the proportion of increased income that is spent on consumption. The marginal propensity to consume always lies between 0 and 1. It cannot be more than 1 because the change in consumption due to a change in income cannot be more than the increased income.