Question

Marginal Propensity to Consume (MPC) =

• A. \(\frac{C}{Y}\)
• B. \(\frac{Y}{C}\)
• C. \(\frac{\Delta Y}{\Delta C}\)
• D. \(\frac{\Delta C}{\Delta Y}\)

Hint:

Always remember that \(MPC + MPS = 1\).
If you know the value of MPC, you can easily find MPS by subtracting it from 1.
This relationship exists because any additional unit of income must be either consumed or saved.

Answer 1

The Correct Option is D

Step 1: Understanding the Concept:
The Marginal Propensity to Consume (MPC) is an economic measure that quantifies the induced consumption.
It represents the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, rather than saving it.
In a Keynesian consumption function, MPC represents the slope of the consumption line.
Step 2: Key Formula or Approach:
The formula for Marginal Propensity to Consume (MPC) is the ratio of the change in consumption (\(\Delta C\)) to the change in income (\(\Delta Y\)).
Mathematically, it is expressed as:
\[ MPC = \frac{\Delta C}{\Delta Y} \]
Where:
\(\Delta C\) = Change in Consumption Expenditure
\(\Delta Y\) = Change in Disposable Income
Step 3: Detailed Explanation:
To distinguish MPC from other related concepts:
1. Average Propensity to Consume (APC): It is the ratio of total consumption to total income at a specific level, given by \(APC = \frac{C}{Y}\).
2. Marginal Propensity to Save (MPS): It is the ratio of the change in savings to the change in income, given by \(MPS = \frac{\Delta S}{\Delta Y}\).
In the given options:
- Option (A) \(\frac{C}{Y}\) is the formula for APC.
- Option (C) \(\frac{\Delta Y}{\Delta C}\) is the reciprocal of MPC and does not have a standard economic label.
- Option (D) \(\frac{\Delta C}{\Delta Y}\) correctly matches the definition of MPC, showing how much extra consumption is generated per unit of extra income.
Usually, \(0<MPC<1\), as people typically consume some but not all of their additional income.
Step 4: Final Answer:
The correct formula for Marginal Propensity to Consume is \(\frac{\Delta C}{\Delta Y}\).