In an economy, C = C̄ + cY, where C̄ > 0 and 0 < c < 1. Consider the following statements:
(A) As income rises, the APC falls.
(B) As income rises, the MPC falls.
(C) As income rises, the APS rises.
(D) The MPS stays the same at every level of income.
(E) The APS is negative at every level of income.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A), (C) and (D) only
With C̄ > 0, APC = C/Y = C̄/Y + c. As Y rises, C̄/Y gets smaller, while c stays the same.
(A) As income rises, the APC falls. — Correct. The part C̄/Y falls as income rises, so the APC falls towards c.
(B) As income rises, the MPC falls. — Incorrect. The MPC is c, a constant in this function.
(C) As income rises, the APS rises. — Correct. APS = 1 − APC. When the APC falls, the APS rises.
(D) The MPS stays the same at every level of income. — Correct. MPS = 1 − c, and c does not change.
(E) The APS is negative at every level of income. — Incorrect. The APS is negative only at low incomes, where C is more than Y. At high incomes saving is positive, so the APS is positive.
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. …” “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. |