Question

If the consumption function is

C = 50+2√Y

calculate MPC and MPS when Y = 36 and give an interpretation of these results.

Answer 1

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(a)

MPC is determined as the slope of the consumption function.

$MPC=\frac{dC}{dy}\\=\frac{d}{dy}(50+2\sqrt y)\\=y^{\frac{−1}{2}}=36^{\frac{-1}{2}}=0.1667$

To determine MPS at y=36 substitute 36 for y in MPC.

$MPS=1−(36)^{−\frac{1}{2}}\\=1−\frac{1}{6}\\=\frac{5}{6}=0.833$