Question

You are told that lebogang consumes half of every extra rand she receives. In addition, she receives R50 monthly as student living allowance from the south African government. The expression for consumption functions can be written as

Answer 1

Consumption function is generally expressed as    C  =  a + b(YD)

 Where,   C is consumption

                 a is   Autonomous consumption / Expenditure

                 b is Marginal propensity to consume or MPC

                 YD is Disposable income

    Now, as per the question Lebogang consumes half of every extra income (rand) she receives, therefore her marginal propensity to consume or MPC, b = 0.5

     Additionally, a = R 50, her autonomous expenditure as rent irrespective of her income.

     And hence her consumption function can be written as: C = 50 + 0.5Y.  

     Therefore, her consumption can be calculated at any level of disposable income through the highlighted consumption function.