question_answer

Calculate marginal propensity to consume from the following data about an economy which is in equilibrium:

National Income = 1500

Autonomous consumption expenditure = 300

Investment expenditure = 300

Answer:

We know that in equilibrium,

\[Y=C+I\]

where,

I is investment expenditure, given as 300

Y is national income, given as 1500 and, \[C=\overline{C}+cY\]

here, \[\overline{C}\] is autonomous consumption expenditure, given as 300, c is marginal propensity to consume. Thus, putting the values in the equation, we have \[Y=\overline{C}+cY+I\]

or,        \[1500=300+c\times 1500+300\]

or,        \[\frac{1500-600}{1500}=0.6\]

Thus, marginal propensity to cinsume is 0.6.