Question

If a straight-line consumption function makes a positive intercept at the Y-axis, it implies that the Marginal Propensity to Consume _____ and the Average Propensity to Consume _______ as the level of income rises. (Fill up the blanks with the correct alternative.)

• A. remains constant, rises
• B. falls, falls
• C. rises, rises
• D. remains constant, falls

Hint:

MPC refers to the change in consumption with respect to income, while APC is total consumption divided by income.

Answer 1

The Correct Option is D

For a straight-line consumption function, the Marginal Propensity to Consume (MPC) remains constant as it is the slope of the line. The Average Propensity to Consume (APC) falls as income increases because fixed consumption forms a smaller fraction of total income.