The consumption function used in the textbook is based on a number of assumptions.Given these assumptions,which of the following statements is true? A)Below a certain level of income,APC 1 and MPC

Question

The consumption function used in the textbook is based on a number of assumptions.Given these assumptions,which of the following statements is true?
A)Below a certain level of income,APC > 1 and MPC < 0.
B)The MPC and APC are always less than unity.
C)As income rises,the MPC falls and the APC rises.
D)The MPC is greater than zero and less than one,and the APC falls as income rises.
E)The APC is greater than zero and less than one,and the MPC falls as income rises.

Quizplus · Accepted Answer

According to the textbook, the consumption function assumes that the MPC is greater than zero and less than one, and the APC falls as income rises. This means that as income increases, people tend to spend a smaller proportion of their income, which leads to a falling APC. However, they do still spend more in absolute terms, which results in a positive MPC (albeit less than one). Choice A is incorrect because APC can never be greater than one. Choice B is incorrect because the MPC and APC can be greater than one in some cases (such as when people borrow to finance consumption). Choice C is incorrect because the MPC can actually rise or fall as income rises, depending on various factors such as the availability of credit and consumer attitudes towards saving. Choice E is incorrect because the APC can never be greater than one.

The Consumption Function Used in the Textbook Is Based on a Number