Read the passage carefully and answer the questions based on the passage:
Aggregate Demand and Its Components
Consumption may denote not what people have actually consumed in a given year, but what they had planned to consume during the same period. Similarly, investment can mean the amount a producer plans to add to her inventory. It may be different from what she ends up doing. The planned values of the variables are called their ex ante measures. The most important determinant of consumption demand is household income. A consumption function describes the relation between consumption and income. The simplest consumption function assumes that consumption changes at a constant rate as income changes. Of course, even if income is zero, some consumption still takes place. Since this level of consumption is independent of income, it is called autonomous consumption. The induced component of consumption, cY shows the dependence of consumption on income.
Which of the following is not correct for marginal propensity to consume?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → \( 0< MPC>1 \)
The marginal propensity to consume (MPC) is the change in consumption per unit change in income. The change in consumption can never exceed the change in income, so MPC cannot be more than 1. The expression in Option (3) makes MPC greater than 1.
Option (1) \( MPC=0 \) — True. Income rises, but the consumer does not change consumption at all.
Option (2) \( MPC=1 \) — True. The consumer spends the entire change in income on consumption.
Option (3) \( 0< MPC>1 \) — False. MPC lies between 0 and 1, both values included.
Option (4) \( 0< MPC<1 \) — True. The consumer spends part of the change in income on consumption and saves the rest.
NCERT (2026-27): “4.1.1. Consumption … The induced component of consumption, cY shows the dependence of consumption on income. When income rises by Re 1. induced consumption rises by MPC i.e. c or the marginal propensity to consume. It may be explained as a rate of change of consumption as income changes. … … Now, let us look at the value that MPC can take. When income changes, change in consumption ( ΔC ) can never exceed the change in income ( Δ Y) . The maximum value which c can take is 1. On the other hand consumer may choose not to change consumption even when income has changed. In this case MPC = 0. Generally, MPC lies between 0 and 1 (inclusive of both values). This means that as income increases either the consumers does not increase consumption at all (MPC = 0) or use entire change in income on consumption (MPC = 1) or use part of the change in income for changing consumption (0< MPC<1).” |