Marginal Propensity to Consume and Save

C

Since the MPC is determined according to the ratio: MPC = additional consumption divided by additional income, the MPC here equals: 300/400 = .75. MPS = 1-

MPC so MPS = .25.

To determine the marginal propensities to consume (MPC) and save (MPS), we need to calculate the change in consumption and disposable income and then divide the change in consumption by the change in income.

Let's start with the given information:

• Consumption when disposable income is $1,200 is 1,100.
• Consumption when disposable income is $1,600 is 1,400.

The change in consumption is calculated as follows: Change in Consumption = New Consumption - Initial Consumption Change in Consumption = 1,400 - 1,100 Change in Consumption = 300

The change in disposable income is calculated as follows: Change in Income = New Income - Initial Income Change in Income = 1,600 - 1,200 Change in Income = 400

Now, we can calculate the marginal propensity to consume (MPC) by dividing the change in consumption by the change in income: MPC = Change in Consumption / Change in Income MPC = 300 / 400 MPC = 3/4

Similarly, the marginal propensity to save (MPS) is the complementary value of the marginal propensity to consume: MPS = 1 - MPC MPS = 1 - 3/4 MPS = 1/4

Therefore, the correct answer is: C. MPC = 3/4; MPS = 1/4

The marginal propensity to consume (MPC) represents the portion of additional income that individuals or households spend on consumption. In this case, for every additional dollar of disposable income, individuals spend 3/4 (or 75 cents) on consumption.

The marginal propensity to save (MPS) represents the portion of additional income that individuals or households save. In this case, for every additional dollar of disposable income, individuals save 1/4 (or 25 cents).

It's important to note that the MPC and MPS values can range from 0 to 1, where 0 indicates no spending or saving, and 1 indicates that all additional income is spent or saved, respectively.