Which of the following changes in disposable income would lead to the smallest increase in consumption?
A)a $20,000 increase in disposable income, if MPC equals 0.5
B)a $12,000 increase in disposable income, if MPC equals 0.75
C)a $15,000 increase in disposable income, if MPC equals 0.6
D)a $30,000 increase in disposable income, if MPC equals 0.25

Question

Which of the following changes in disposable income would lead to the smallest increase in consumption?
A)​a $20,000 increase in disposable income, if MPC equals 0.5
B)​a $12,000 increase in disposable income, if MPC equals 0.75
C)​a $15,000 increase in disposable income, if MPC equals 0.6
D)​a $30,000 increase in disposable income, if MPC equals 0.25

Quizplus · Accepted Answer

The smallest increase in consumption would be when MPC (marginal propensity to consume) is the lowest. MPC is the proportion of additional income that is spent on consumption. The lower the MPC, the less of the additional income is spent on consumption. 
Therefore, in option D, even though the increase in disposable income is high, the MPC is only 0.25, which means only a quarter of the increase in income will be spent on consumption. Hence, the smallest increase in consumption would be in this option.

Which of the Following Changes in Disposable Income Would Lead