An economy has the consumption function C = 60 + 0.75Y. Consider the following statements:
(A) When income is zero, saving is zero.
(B) At an income of 240, the APC is 1.
(C) At an income of 480, saving is 60.
(D) The MPS is 0.25 at every level of income.
(E) At an income of 480, the APC is 0.75.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (B), (C) and (D) only
Here autonomous consumption is 60 and c = 0.75. Saving is S = Y − C = −60 + 0.25Y.
(A) When income is zero, saving is zero. — Incorrect. At Y = 0, C = 60, so saving is −60.
(B) At an income of 240, the APC is 1. — Correct. At Y = 240, C = 60 + 180 = 240. APC = 240/240 = 1.
(C) At an income of 480, saving is 60. — Correct. At Y = 480, C = 60 + 360 = 420. S = 480 − 420 = 60.
(D) The MPS is 0.25 at every level of income. — Correct. MPS = 1 − 0.75 = 0.25, the same at every income.
(E) At an income of 480, the APC is 0.75. — Incorrect. At Y = 480, APC = 420/480 = 0.875. 0.75 is the MPC, not the APC.
NCERT (2026-27): “4.1.1 Consumption … Imagine a country Imagenia which has a consumption function described by C=100+0.8Y . This indicates that even when Imagenia does not have any income, its citizens still consume Rs. 100 worth of goods. Imagenia’s autonomous consumption is 100. Its marginal propensity to consume is 0.8. This means that if income goes up by Rs. 100 in Imagenia, consumption will go up by Rs. 80. Let us also look at another dimension of this, savings. Savings is that part of income that is not consumed. …” “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. |