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
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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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