Answer to Question #249225 in Macroeconomics for Biba

Question

4. I consume all my income at every level of income. Draw my consumption and saving functions. What are my MPC and MPS?

Answer 1

The link between disposable income and consumer consumption is defined by the consumption schedule, often known as the consumption function. Propensity to consume is a term used in the field of consuming. This is the percentage of total earnings or income growth that people prefer to spend instead of conserving on goods and services.

As the individual consume all the income it means MPC is equal to 1 and as the individuals don’t save anything so MPS is zero.

So consumption function is a 45 degree line passing through origin in consumption income framework and savings function is a horizontal straight line at zero.

Here we are assuming that autonomous income is zero

Represent the graph as follows: