Question

Read the following statements carefully:
Statement 1: Marginal Propensity to Consume (MPC) refers to the consumption per unit of income.
Statement 2:As the income increases, the proportionate increase in the level of consumption is always more than the increase in the level of income.
In the light of the given statements, choose the correct option from the following:

• 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:

Remember: As income rises, people tend to save more, so the increase in consumption is proportionally less than the increase in income.

Answer 1

The Correct Option is A

Statement 1 is true because Marginal Propensity to Consume (MPC) is defined as the additional consumption out of an additional unit of income.
Statement 2 is false because according to Keynesian consumption theory, as income rises, the proportionate increase in consumption is typically less than the increase in income, due to the tendency of individuals to save a part of their additional income.