If, in an economy, the minimum level of consumption is 45 and 80% of an increase in income (Y) is consumed, what will be the consumption function of this economy?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → $45+0.80Y$
The general form of the consumption function is:
C=a+bY where,
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a = autonomous (minimum) consumption
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b = marginal propensity to consume (MPC)
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Y = income
Given:
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a=45
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b=0.80
Thus, C=45+0.80Y