2. 3. Terese can expect to earn an annual income of $8,000 under normal circumst

Question

2.

3.

Terese can expect to earn an annual income of $8,000 under normal circumstances and $10,000 in the event that she gets a sales bonus. You can assume that Terese does not pay taxes, so her total income and disposable income are the same. This table shows Terese's consumption and saving at the two different income levels. First, find the average propensity to consume (APC) and the average propensity to save (APS) at both income levels. Then, find the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) when Terese's income rises from $8,000 to $10,000. Income Consumption Saving APC $8,000 $10,000 APS MPC MPS $7,600 $9,200 $400 $800 Mathematically, it must always be true that Disposable Income Consumption +Saving Therefore, it must also be true that APCAPS APC APS APS APC

Explanation / Answer

APC = Consumption (C) / Income (Y).

APS = Savings (S) / Income (Y).

MPC = change in Consumption (C) /Change in Income (Y).

MPS = change in Savings (S) /Change in Income (Y).

Income APC APS MPC MPS

$8000 7600/8000=0.95, 400/8000=0.05

$1000 9200/10000=0.92 800/10000= 0.08 (9200-7600)/(10000-8000) =(800-400)/(10000-8000)

= 0.8 =0.2

MPC + MPS =1

Up from C0 to C1

and Up from S0 to S2

autonomous Proporttion of Imports is 25

AE = 50 + 0.70Y + 75 + 25 +50 - ( 25 + (-0.10)Y)

=175 + ( 0.70 - 0.10)Y

= 175 + 0.60Y

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