Unformatted text preview: decades, we obtain a curve like the one on the right above. That curve has an intercept equal to zero. The same ray from the origin goes through C A-Y A and C B-Y B . Because one ray goes through both points the slope is the same and the APC is constant as income increases. The Consumption Puzzle then is “Is the APC constant with increases in income or does it decrease with increases in income?” Two famous theories of the Consumption Function have attempted to answer that question. The first is the “Life Cycle Theory of Consumption” by Franco Modigliani and the second is the “Permanent Income Theory” by Milton Friedman....
View Full Document
- Winter '11
- Consumption function, APC, Milton Friedman, Permanent income hypothesis, Total Consumption curve