Question

Use the behavioural equations below and answer the questions that follow:

C = R4 billion + c₁Y_D = R19.7 billion

Y= R13.1 billion

T= R6 billion

c₀ = R13.5 billion

i.                   Calculate the propensity to consume.                                                                 (4)

Answer 1

Here we are given the consumption equation C = 4billion + c₁Y_D = 19.7billion

Y means income so here we have Y = 13.1billion

T refers to taxes and here T = 6billion

c₀ is autonomous consumption and here it is c₀ = 13.5billion

Solution is as follows :- 

          $C = c_0 + cY_d$

 $19.7=13.5 + c (Y − T)$  since Yd is disposable income ( income − taxes )      

         

$19.7=13.5 + c (13.1 − 6) \\ 19.7=13.5 + c (7.1) \\ 19.7-13.5=c (7.1) \\ 6.2=c 7.1 \\ c=\frac{6.2 }{ 7.1}\\ c=0.87$

Therefore we have the marginal propensity to consume as 0.87