Quiz 27: Business Cycles, Unemployment, and Inflation

Business

(a) For the given table, the values of consumption, average propensity to consume, average propensity to save, marginal propensity to consume, and marginal propensity to save are required to be calculated. The values for saving for each level of income are given. The formulae to be applied are as follows: img img The required values are as follows: img Table 1 (b) The break-even level of income is that level of income where saving is zero. As is clear from Table 1, saving is zero when income is $260. Therefore, the break-even level of income is $260. When income is $240, then saving is in negative. Economists refer to this situation as dissaving. (c) As income rises, APC falls, APS rises, and MPC and MPS remain constant.

In everyday use, rent is used to describe payment for legal borrowing of goods and services. Like for many people mainly households, rent means money paid for the use of an apartment or house and for business persons, rent is payment for using factory, building, machine and warehouses. For instance, a person rents a tool for an equipment rental company, this rent includes part of the capital cost of the commodity plus maintenance plus share of taxes on it plus profit to owners. Economist defines rent in restrictive way. Economic rent is the price paid for using land and other natural resources that are completely fixed in total supply. Rent is the sum of two components first is implicit rent and second is explicit rent. It can be described mathematically as follows: img where implicit rent is the rent for using natural resources, like using groundwater and explicit rent is simply rent of house or apartment. The land is completely fixed in total supply, as land is a natural resource. So, rent need not to pay by society, no matter how high the rent, the same amount of land will be available thus rent serves no incentive for land. While rental payments are useful in guiding the land's productive use as land is a natural resource and society has free access to it. If the rental value is paid by them, then they care about land's productivity and produced that level of output which would not reduce soil's or land's productivity.

Consumers spend a part of their disposable income in purchasing goods and services and save the remaining. This behavior determines their consumption and saving functions. For a given change in disposable income, one portion of increased income is spent, and the other is saved. The ratio of changed consumption to changed disposable income displays marginal propensity to consume. Similarly, the ratio of changed saving to changed disposable income displays marginal propensity to save. Since changed consumption and changed saving are together equal to the change in disposable income, the sum of marginal propensity to consume and marginal propensity to save is one. Also note that average propensity to consume measures the ratio of consumption to disposable income. In a similar manner, average propensity to save measures the ratio of saving to disposable income. Again, since consumption and saving are together equal to the disposable income, the sum of average propensity to save and average propensity to consume is one. In the given case, the slope of the consumption function, the marginal propensity to consume is 0.75. Consumption and saving schedules are exhibited in Figure 1. img Note that the slope of the saving schedule is marginal propensity to save. Since the sum of marginal propensity to consume and marginal propensity to save is one and marginal propensity to consume is 0.75, marginal propensity to save is 0.25. img Hence, img is correct.

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