What is the value of MPC given that an initial investment increase results in a total income increase of Rs 5000?
Understand the Problem
The question is asking for the marginal propensity to consume (MPC) based on the increase in total income resulting from an initial investment. We need to calculate MPC using the formula MPC = Change in Consumption / Change in Income.
Answer
The formula for MPC is $MPC = \frac{\Delta C}{\Delta Y}$.
Answer for screen readers
The marginal propensity to consume (MPC) can be expressed as
$$ \text{MPC} = \frac{\Delta C}{\Delta Y} $$
Substituting for ΔC and ΔY with the computed values will yield the final result.
Steps to Solve
- Identify the Variables
We need the change in consumption and the change in income to calculate the MPC. Let's denote these as:
- Change in Consumption: ΔC
- Change in Income: ΔY
- Determine the Change in Income
If there is an initial investment (let's say $I$), the change in income can be calculated. If we know the multiplier effect, we can calculate it by using the formula:
$$ \Delta Y = \text{Multiplier} \times I $$
- Determine the Change in Consumption
Next, we need to determine the change in consumption resulting from the change in income. If we assume the change in consumption corresponds directly to the MPC, we can express consumption with the formula:
$$ \Delta C = \text{MPC} \times \Delta Y $$
- Calculate the MPC
Using the values for ΔC and ΔY, we can now calculate the MPC using the formula:
$$ \text{MPC} = \frac{\Delta C}{\Delta Y} $$
- Final Computation
Substitute the values of ΔC and ΔY in the formula and simplify to find the MPC.
The marginal propensity to consume (MPC) can be expressed as
$$ \text{MPC} = \frac{\Delta C}{\Delta Y} $$
Substituting for ΔC and ΔY with the computed values will yield the final result.
More Information
The marginal propensity to consume (MPC) reflects how much consumption will change with an increase in income. An MPC of 0.8, for example, means consumers spend 80 cents for every additional dollar of income.
Tips
- Miscalculating the change in income or consumption due to not accounting for factors like taxes, savings, or inflation.
- Confusing the MPC with the marginal propensity to save (MPS), which generally complements the MPC.
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