The idea of the Consumption function was created during the Great Depression. Ke
ID: 1099423 • Letter: T
Question
The idea of the Consumption function was created during the Great Depression. Keynes was able to point out their is a relationship between individuals consumption and their income. Below is hypothetical consumer spending for three individuals(A,B,C):
Consumer Spending
Answer the following questions about each individual A, B, and C:
1. Derive each individual's Marginal Propensity to Consume(MPC).
MPC = Change in Consumption / Change in Disposable Income
2. What is the multiplier for each individual?
Multiplier = 1 / ( 1-MPC)
3. What would be your own personal consumption function? Why does it make sense that there is some level of consumer spending, when disposable income is 0?
You should have a Consumer Spending when Disposable Income equals 0 and 10,000 like the example above.
Disposable Income A B C 0 5,000 4,000 5,000 10,000 12,000 12,000 14,000Explanation / Answer
1. MPC
A: (12000 - 5000)/10000 = 0.7
B: (12000 - 4000)/10000 = 0.8
C: (14000 - 5000)/10000 = 0.9
2. Multiplier = 1/(1 - MPC)
A: 1/(1 - 0.7) = 1/0.3 = 3.333
B: 1/(1 - 0.8) = 1/0.2 = 5
A: 1/(1 - 0.9) = 1/0.1 = 10
3. My consumption function:
Consumption when disposable income 0 = $10,000
Consumption when disposable income $10,000 = $16,000
Even with zero level of disposable income, there is some consumption because people need basic goods like food, home etc. just so that they are able to survive. They are bound to consume this amount even if they earn nothing.
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