If C = 10 + 0.7I - 0.2 is a consumption function,then the marginal propensity to consume and the marginal propensity to save when I = 25 are respectively given by
A) 0.6 and 0.4.
B) 0.68 and 0.32.
C) 0.72 and 0.28.
D) 0.8 and 0.2.
E) 0.2 and 0.8.

Question

If C = 10 + 0.7I - 0.2  is a consumption function,then the marginal propensity to consume and the marginal propensity to save when I = 25 are respectively given by
A) 0.6 and 0.4. 
B) 0.68 and 0.32. 
C) 0.72 and 0.28. 
D) 0.8 and 0.2. 
E) 0.2 and 0.8.

Quizplus · Accepted Answer

The formula for marginal propensity to consume (MPC) is the change in consumption over the change in income:

MPC = ΔC/ΔI

Taking the derivative of the given consumption function with respect to income (I), we get:

dC/dI = 0.7 - 0.2(11ea83f6_6341_51eb_b5a5_954444bc085d_TB6578_11_TB6578_11)

Substituting I = 25, we get:

dC/dI = 0.7 - 0.2(25) = 0.68

Thus, the MPC is 0.68 when I = 25.

The marginal propensity to save (MPS) is simply the complement of the MPC, i.e.,

MPS = 1 - MPC = 1 - 0.68 = 0.32

Therefore, the answer is B) 0.68 and 0.32.