Question

Exactly how were the MPC and MPS in Table 21-4 computed? Illustrate by calculating MPC and MPS between points A and B. Explain why it must always be true that MPC  MPS  1 .

Answer 1

There is an increase in savings when income increases. The consumption can also increase as a result of increase in income.

Marginal Propensity to Consume (MPC)

$MPC = \frac{Consumption \ Change}{Income\ Change}$

$Consumption \ at \ Point \ A = 24200$

$Consumption \ at \ Point \ B = 25000$

$Consumption \ Change= 25000 - 24200$

$Consumption \ Change= 800$

$Point \ A \ income = 24000$

$Point \ B \ income = 25000$

$Income\ change = 25000 - 24000 = 1000$

$MPC = \frac{800}{1000}$

$MPC =0.8$

Marginal Propensity to Save (MPS)

$MPS = \frac{Change\ in \ Savings}{Income\ Change}$

$Savings \ at \ Point \ A = -200 \\ Savings\ at \ Point = 0 \\ Change \ in \ savings = 0 -- 200 = 200 \\ Income \ at \ Point\ A = 24000 \\ Income \ at\ point \ B = 25000 \\ Change \ in \ Income = 25000 - 24000 = 1000 \\ MPS= \frac{200}{1000} = 0.2 \\ 0.2 + 0.8 = 1 \\ Therefore, it\ is\ true\ that\ MPC+ MPS = 1, \ since \\ 0.8 + 0.2 = 1$