Question

In the consumption function \( C = \overline{C} + C \cdot Y \), what are \( \overline{C} \) and \( C \) respectively?

• A. Autonomous consumption and marginal propensity to consume
• B. Marginal propensity to consume and autonomous consumption
• C. Total consumption and average propensity to consume
• D. None of these

Hint:

In the consumption function, \( \overline{C} \) is autonomous consumption (the consumption that happens even when income is zero), and \( C \) is the marginal propensity to consume (how much consumption changes with a change in income).

Answer 1

The Correct Option is A

Step 1: Understanding the Consumption Function:
The consumption function is a fundamental concept in economics that shows the relationship between consumption and income. The general form of the consumption function is: \[ C = \overline{C} + C \cdot Y \] Where:
- \( C \) is the total consumption.
- \( \overline{C} \) is the autonomous consumption (the part of consumption that does not depend on income).
- \( C \) is the marginal propensity to consume (MPC), which represents the change in consumption resulting from a change in income.
- \( Y \) is the income level.
Step 2: Interpreting the Variables:
- \( \overline{C} \) is the autonomous consumption. This is the consumption that occurs even when income \( Y \) is zero, meaning it is independent of income.
- \( C \) is the marginal propensity to consume (MPC), which measures the change in consumption resulting from a change in income. It is the slope of the consumption function.
Step 3: Analyzing the Options:
- Option (A) Autonomous consumption and marginal propensity to consume: This is the correct answer. \( \overline{C} \) represents autonomous consumption, and \( C \) represents the marginal propensity to consume.
- Option (B) Marginal propensity to consume and autonomous consumption: This is incorrect because \( \overline{C} \) is the autonomous consumption and \( C \) is the marginal propensity to consume. The terms are reversed here.
- Option (C) Total consumption and average propensity to consume: This is incorrect. Total consumption is represented by \( C \), but the average propensity to consume is the ratio of total consumption to income, which is not directly represented in the consumption function.
- Option (D) None of these: This is incorrect, as option (A) is the correct answer.
Step 4: Conclusion and Answer:
The correct answer is (A) because in the consumption function \( C = \overline{C} + C \cdot Y \), \( \overline{C} \) represents autonomous consumption, and \( C \) represents the marginal propensity to consume.