Question

Suppose Raju enters the job market at age 25 and earns annual income of Rs. 6000. He retires at age 65 and his life expectancy is 75 years. He does not own any assets. Assume that Raju consumes annual income uniformly over his lifetime. What will be his average propensity to consume during employment years?

• A. 0.90
• B. 0.80
• C. 0.50
• D. 0.4

Hint:

The average propensity to consume during employment years is calculated as the ratio of income consumed to the total income during the working years.

Answer 1

The Correct Option is B

Step 1: Understand the question.
Raju works from age 25 to 65, so he works for 40 years. His total income during this period is \( 6000 \times 40 = 240000 \). He consumes this income uniformly, meaning his consumption is spread over the 40 years he works. After retirement, the remaining 10 years of his life expectancy will be spent without income.
Step 2: Calculate the average propensity to consume.
The average propensity to consume (APC) is the ratio of total consumption to total income. During employment, Raju consumes his entire income. Thus, his average propensity to consume during employment is: \[ APC = \frac{\text{Total Consumption}}{\text{Total Income}} = \frac{240000}{240000} = 1. \] However, since this is the average across his entire lifetime, we need to consider that his consumption will continue at the same rate even after retirement. This implies that his total lifetime consumption (including post-retirement years) is based on spreading his income evenly over his working and retirement years. Thus, during employment years, the APC is lower. Thus, the correct average propensity to consume during employment years is (B) 0.80.