Question

Read the following statements carefully: Statement 1: Constant rate of change of consumption (\(\Delta C\)) with respect to change in income (\(\Delta Y\)), is the reason for the straight-line consumption curve. Statement 2: Marginal rate of change between consumption and income is defined as Average Propensity to Consume (APC). (Choose the correct alternative)

• A. Statement 1 is true and Statement 2 is false.
• B. Statement 1 is false and Statement 2 is true.
• C. Both Statements 1 and 2 are true.
• D. Both Statements 1 and 2 are false.

Hint:

MPC measures the change in consumption due to a change in income, whereas APC measures total consumption as a percentage of total income.

Answer 1

The Correct Option is A

1. Statement 1 is true
- The straight-line consumption curve exists because the Marginal Propensity to Consume (MPC) remains constant, meaning \(\Delta C / \Delta Y\) is unchanged. 2. Statement 2 is false
- The marginal rate of change between consumption and income is known as Marginal Propensity to Consume (MPC), not Average Propensity to Consume (APC).
- APC is calculated as \( C/Y \), which measures the proportion of total income spent on consumption. Conclusion: Since Statement 1 is correct but Statement 2 is incorrect, option (A) is correct.