What is marginal propensity to consumption spending.?

Question

Use the following to answer question:

Exhibit: Consumption Spending

Suppose that the consumption function is:

C= $500+0.8 x YD

Where YD is disposable income.

The marginal propensity to conume is:

A) $500

B) 0.

C) 0.8

D) 0.2

Answer 1

The marginal propensity to consume (MPC) is the amount of a person's discretionary income that they spend.  In this problem, 500 dollars of the person's consumption goes toward fixed or necessary costs (this could be something like rent).

The other part of the problem, 0.8*YD shows that the person spends 0.8, or 80% of their discretionary income.  So the answer is C.

Answer 2

C) 0.8

C=C0+MPC*Yd