In an economy, C = C̄ + cY, where C̄ > 0 and 0 < c < 1. Which of the following holds at every positive level of income?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → The APC is greater than the MPC
Divide the consumption function by Y: APC = C/Y = C̄/Y + c. The MPC is c. Since C̄ > 0, the extra part C̄/Y is positive at every positive income, so APC > MPC.
For example, with C = 100 + 0.8Y and Y = 1,000: APC = 900/1,000 = 0.9, while MPC = 0.8.
Option (2) The APC is equal to the MPC — Incorrect. APC equals MPC only when C̄ = 0.
Option (3) The APC is less than the MPC — Incorrect. This would need C̄ to be negative.
Option (4) The APC is greater than 1 — Incorrect. APC is more than 1 only at low incomes, where consumption is more than income. At high incomes it is below 1.
NCERT (2026-27): “4.1.1 Consumption 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. … Autonomous consumption is denoted by C̄ and shows the consumption which is independent of income. If consumption takes place even when income is zero, it is because of autonomous 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. …” “Some Definitions Marginal propensity to consume (MPC): it is the change in consumption per unit change in income. It is denoted by c and is equal to ΔC/ΔY. |