Question

Mpho’s monthly disposable income increases from R1 800 to R2 300. As a result, his monthly savings increase from R290 to R440. This implies that his marginal propensity to consume is the following 

Answer 1

$\bold {Answer}$

$MPC = \bold {0.7}$

$\bold {Solution}$

Marginal propensity to consume (MPC) measures the change in consumption derived from a dollar change in disposable income.

$MPC = \dfrac {∆C}{∆Y_D}$ Where $∆C$ is the change in consumption and $∆Y_D$ is the change in disposable income.

Because income is either consumed or saved,

$C + S = Y_D$ Where $C$ represents consumption, $S$ represents savings, and $Y_D$ is the disposable income.

Consequently,

$MPC + MPS = 1,$ where $MPS$ is the marginal propensity to save.

$=> MPC = 1-MPS$

MPS measures the change in savings derived from a dollar change in disposable income.

$MPS = \dfrac {∆S}{∆Y_D}$

$= \dfrac {R440-R290}{R2 \space 300 - R1 \space 800}$

$= \dfrac {R150}{R500}$

$= \bold {0.3}$

$=> MPC = 1-0.3$

$= \bold {0.7}$