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The expenditure E_{c} of a person with income I is given by E_{c} = (0.000035) I^{2} + (0.045) I. Find marginal propensity to consume (MPC) and marginal propensity to save (MPS) when I = 5000. Also find A (average) PC and A (average)
PS.
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Solution
`E_c=(0.000035)I^2+(0.045)I`
`MP_c=(dE_c)/(dI)`
`=d/(dI)[(0.000035)I^2+(0.045)I]`
`=(0.000035)(2I)+(0.045)`
`=(0.00007)I+0.045`
`(MPC)_(I=5000)=(0.00007)(5000)+0.045`
`=0.395`
We know
`MPS=1-MPC`
`(MPS)_(I=5000)=1-(MPC)_(I=5000)`
`=1-0.395`
`=0.605`
`Now " "APC=E_c/I=((0.000035)^2+(0.045)I)/I`
`=(0.000035)I+(0.045)`
`(APC)_(I=5000)=(0.000035)(5000)+(0.045)`
`=0.175+0.045`
`=0.22`
We have
`(APS)=1-APC`
`(APS)_(I=5000)=1-(APC)_(I=5000)`
`=1-0.22`
`=0.78`
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