Chapter 30, 31, 32 _ ECON 2020.pdf - CHAPTER 30 Problem 30-1(Algo Example \$240 244 \$-4 1.017t-0.017 To find the level of consumption(column 2

# Chapter 30, 31, 32 _ ECON 2020.pdf - CHAPTER 30 Problem...

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CHAPTER 30 Problem 30-1 (Algo) Example: \$240 244 \$-4 1.017t -0.017 To find the level of consumption (column 2): Consumption = income – saving. Example: At income of \$280, consumption = \$280 – \$4 = \$276. To find the average propensity to consume (APC) (column 4): APC = consumption/income. Example: At income of \$280, APC = \$276/\$280 = 0.986. To find the average propensity to save (APS) (column 5): APS = saving/income. Example: At income of \$280, APS = \$4/\$280 = 4. To find the marginal propensity to consume (MPC) (column 6): MPC = Δ consumption/ Δ income. Example: At income of \$280 (from \$260), MPC = (\$276 – \$260)/(\$280 – \$260) = 0.800. To find the marginal propensity to save (MPS) (column 7): MPS= Δ saving/ Δ income. Example: At income of \$280 (from \$260), MPS = (\$0.986 – \$1.000)/(\$280 – \$260) = 0.200. b. The break-even level of income is where saving equals zero (consumption equals income). Thus, the break-even level of income is \$260. At income levels below the break-even level of income, saving is negative. Economists refer to this as dissaving. c. MPS: Constant (does not change with income). Problem 30-2 (Algo) a. To find the marginal propensity to consume (MPC): MPC = Δ Consumption/ Δ Income. MPC = \$36/\$40 = 0.9. To find the marginal propensity to save (MPS): MPS = Δ Saving/ Δ Income. MPS = \$4/\$40 = 0.1. b. To find the average propensity to consume (APC) before the increase in disposable income: APC = Consumption/Income. APC = \$350/\$400 = 0.875. Disposable income after the change equals \$440 (= \$400 + \$40). Consumption after the change equals \$386 (= \$350 + \$36). APC= \$386 / \$440 = 0.877272727. Problem 30-3 (Algo) a. MPC: The marginal propensity to consume is the slope of the linear equation, which equals 0.9. b. MPS: The marginal propensity to save is 1 minus the slope of the linear equation, which equals 0.1 (= 1 – 0.9). c. Consumption: To find the level of consumption, substitute income into the linear equation. This results in a level of consumption of \$600 (= \$60 + 0.9 × \$600 = \$600). d. APC: To find the average propensity to consume, divide consumption by income. This results in an average propensity to consume of 1 (= \$600/\$600). e. Saving: To find the level of saving, subtract consumption from income. This results in a level of saving of \$0 (= \$600 – \$600). f. APS: To find the average propensity to save, divide saving by income. This results in an average propensity to save of 0 (= \$0/\$600). Problem 30-4 (Algo) a. Finding the consumption function: The intercept a is the level of consumption when income is zero. Thus, a = \$70. The slope of the consumption function b is found by looking at the change in consumption relative to the change in income. This is the marginal propensity to consume (MPC). b = MPC = Δ consumption/ Δ income = \$70/\$100 = 0.7. C = \$70 + 0.7Y. Finding the saving function: The intercept – a is the level of saving when income is zero. If consumption is positive when income is zero, there must be dissaving. Thus – a = – \$70. The slope of the saving function (1 – b) is found by
looking at the change in saving relative to the change in income. This is the marginal propensity to save (MPS). MPS = (1 – b) = 1 – MPC = 1 – 0.7 = 0.3 = Δ saving/ Δ income = \$30/\$100. S = – \$70 + 0.3Y. b. The slope of the consumption function b is the marginal propensity to consume (MPC). b = MPC = Δ consumption/ Δ income = \$70/\$100 = 0.7. This implies that \$0.70 of every additional dollar of disposable income will be consumed. The slope of the saving function (1 – b) is the marginal propensity to save (MPS). MPS (1 – b) = 1 –

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