Question

Life cycle theory of consumption postulates that 

(A) Consumption is constant throughout lifetime. 
(B) Marginal propensity to consume out of permanent income is small. 
(C) Marginal propensity to consume out of transitory income is large. 
(D) It emphasizes how to maintain a stable standard of living over the course of life. 
Choose the correct answer from the options given below:
 

• A. (B) and (C) only
• B. (A) and (C) only
• C. (B), (C), and (D) only
• D. (A), (B), (C) and (D)

Hint:

The life cycle theory emphasizes the importance of saving during higher income periods to maintain consumption during retirement or lower income periods.

Answer 1

The Correct Option is C

Step 1: Understand the life cycle theory of consumption.
The life cycle theory of consumption, proposed by economists such as Ando and Modigliani, suggests that individuals plan their consumption and savings behavior over their lifetime. Consumption decisions are based on both permanent and transitory income.

Step 2: Analysis of options.
- (A) Consumption is constant throughout lifetime: This is incorrect. The theory suggests that individuals consume based on their lifetime income, which may fluctuate.
- (B) Marginal propensity to consume out of permanent income is small: This is correct. The theory postulates that individuals are more likely to consume out of their permanent income rather than transitory income.
- (C) Marginal propensity to consume out of transitory income is large: This is correct. The life cycle theory states that people are more likely to consume out of temporary income, such as windfalls or bonuses, rather than out of permanent income.
- (D) It emphasizes how to maintain a stable standard of living over the course of life: This is correct. The theory focuses on how individuals smooth their consumption and maintain a consistent standard of living across different life stages.

Step 3: Conclusion.
The correct answer is (B), (C), and (D) only, as they accurately describe the life cycle theory of consumption.