Question

If in an economy at a certain point of time Total Income and Total Consumption are Rs. 100 crore and Rs. 80 crore respectively; then what will be its Propensity to consume?

• A. 180
• B. 1.25
• C. 0.8
• D. None of these

Hint:

When given total levels of C and Y, the question is asking for the Average Propensity (APC). If it gives the change in C and Y, it would be asking for the Marginal Propensity (MPC).

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
The question uses the term "Propensity to consume" with total income and total consumption data. This refers to the Average Propensity to Consume (APC), which measures the proportion of total income that is spent on consumption.

Step 2: Key Formula or Approach:
The formula for Average Propensity to Consume (APC) is: \[ APC = \frac{\text{Total Consumption (C)}}{\text{Total Income (Y)}} \]

Step 3: Detailed Explanation:
Given the data: \begin{itemize} \item Total Income (Y) = ₹ 100 crore \item Total Consumption (C) = ₹ 80 crore \end{itemize} Substituting these values into the formula: \[ APC = \frac{80}{100} = 0.8 \] This means that 80% of the total income is being consumed.

Step 4: Final Answer:
The Propensity to Consume (APC) is 0.8. Thus, option (C) is the correct answer.