Answer to Question #168895 in Microeconomics for komal

Question

B

Given the aggregate consumption function C = 0.9Y + 100(where C is aggregate consumption and Y is aggregate income)

(a) Find the marginal propensity to consume (MPC) and average propensity to consume (APC)

(b) Find the elasticity of consumption with respect to income, and show that it equals MPC/APC

Answer 1

a) Marginal Propensity to Consume (MPC) = $\delta$C/$\delta$Y = 0.9

The average propensity to consume (APC) is the ratio of consumption expenditures (C) to disposable income (DI), or APC = C / DI

b) Income elasticity of demand is the percent change in quantity demanded divided by the percent change in income, = $\Delta$Q/$\Delta$P*P/Q