Question

Consider the consumption function below and answer the questions that follow: C= 40 + 0.25YD

1.1. Sketch the above function on a graph (5) 1.2. What is the value of autonomous expenditure? (2) 1.3. What is the gradient of the consumption function? (2) 1.4. What is the value of total consumption if disposable income is R2500?

Answer 1

Answer on Question #87745 – Economics / Macroeconomics

QUESTION: Consider the consumption function below and answer the questions that follow: $C = 40 + 0.25YD$.

1.1. Sketch the above function on a graph.

1.2. What is the value of autonomous expenditure?

1.3. What is the gradient of the consumption function?

1.4. What is the value of total consumption if disposable income is R2500?

ANSWER: 1.1 FIGURE

1.2 VALUE OF AUTONOMOUS EXPENDITURE = R 40

1.3 GRADIENT/SLOPE OF CONSUMPTION FUNCTION OR MARGINAL PROPENSITY TO CONSUME(MPC) = 0.25.

1.4 TOTAL CONSUMPTION WHEN YD= R 2500 will be calculated as:

$$\begin{array}{l} = 40 + 0.25(2500) \\ = 40 + 625 \\ = 665 \\ \end{array}$$