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Question
Which of the following points are related with marginal propensity to consume?
Options
Marginal propensity to consume refers to the ratio of change in the consumer's expenditure due to the change in disposable income (income after deducting taxes)
MPC measures how consumption will vary with the change in income.
Both Marginal propensity to consume refers to the ratio of change in the consumer's expenditure due to the change in disposable income (income after deducting taxes) and MPC measures how consumption will vary with the change in income.
None of the above
Solution
Both Marginal propensity to consume refers to the ratio of change in the consumer's expenditure due to the change in disposable income (income after deducting taxes) and MPC measures how consumption will vary with the change in income.
Explanation:
The ratio of change in consumer expenditure to changes in disposable income (income after taxes) is known as the marginal propensity to consume. In other words, MPC calculates how consumption will change as income changes.
So,
MPC = `(Δ"C")/(Δ"Y")`
Where,
ΔC = Change in consumption
ΔY = Change in income
For example, if revenue rises from Rs 200 crores to Rs 250 crores but consumption rises from Rs 20 crores to Rs 40 crores, the MPC is 0.4, implying that a 40% increase in income is spent.