question_answer

An economy is in equilibrium. From the following data, calculate the marginal propensity to save:

(a) Income = 10,000

(b) Autonomous consumption = 500

(c) Consumption expenditure = 8,000

Answer:

Applying the equation:

\[c=\overline{c}+by\]

Where,  c = consumption expenditure (8, 000)

\[\overline{c}\] = autonomous consumption (- 500)

b = MPC (marginal propensity to consume)

y = Income (10,000)

\[8,000=500+b\times 10,000\]

\[8000=500+10,000b\]

\[8000-500=10,000b\]

\[7,500=10,000b\]

\[b=\frac{7,500}{10,000}\]

b = 0.75, MPC = 0.75

Now,

MPS + MPC = 1

\[=1-MPC\]

\[=1-0.75\]

Hence the value of MPS = 0.25