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1. Suppose the Consumption function is given as C = 1500 +0.75Yd. Based on the information, please answer the following questions. A. What is Autonomous consumption? B. What is Marginal Propensity to Consume (MPC)? C. Draw the graph of consumption function? D. Calculate Marginal propensity to save (MPS)? E. Drive saving function F. Draw the graph of saving function. G. What will be saving if the disposable income is 10,000 birr?​

Answers

Answer 1

A. Autonomous consumption is 1500.

B. MPC in this case is 0.75.C.

C.The graph of consumption function is a straight line with slope MPC and passes through 1500 on y-axis.

D. MPS in this case is 0.25.

E. S = Yd – (1500 + 0.75Yd) = 0.25Yd – 1500.

F. The graph of saving function is a straight line with slope MPS and passes through -1500 on y-axis.

G. Savings are 1750 birr when disposable income is 10,000 birr.

Given that Consumption function is C = 1500 + 0.75Yd, where C is consumption expenditure, Yd is disposable income, 1500 is autonomous consumption expenditure, and 0.75 is the marginal propensity to consume (MPC).

A. Autonomous consumption is the consumption expenditure made by households when disposable income is zero. In this case, autonomous consumption is 1500.B. Marginal Propensity to Consume (MPC) is the fraction of change in consumption expenditure resulting from a change in disposable income. MPC is equal to the change in consumption expenditure divided by change in disposable income. MPC in this case is 0.75. C. The graph of consumption function is a straight line with slope MPC and passes through 1500 on y-axis D. Marginal propensity to save (MPS) is the fraction of change in savings resulting from a change in disposable income. MPS is equal to the change in savings divided by change in disposable income. MPC + MPS = 1. Therefore, MPS in this case is 0.25.E. Saving function is given by S = Yd – C, where S is savings. Substituting C = 1500 + 0.75Yd, we get S = Yd – (1500 + 0.75Yd) = 0.25Yd – 1500.F. The graph of saving function is a straight line with slope MPS and passes through -1500 on y-axis.G. If disposable income is 10,000 birr, then consumption expenditure is C = 1500 + 0.75Yd = 1500 + 0.75(10,000) = 8250 birr. Savings are S = Yd – C = 10,000 – 8250 = 1750 birr. Therefore, savings are 1750 birr when disposable income is 10,000 birr.

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