If a consumer spends $300 on goods and the marginal propensity to consume is 0.7

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Question: If a consumer spends $300 on goods and the marginal propensity to consume is 0.75, how much of that income is saved?

Options:

Correct Answer: $100

Solution:

Savings = Income - Consumption; Income = Consumption / MPC = 300 / 0.75 = $400; Savings = 400 - 300 = $100

If a consumer spends $300 on goods and the marginal propensity to consume is 0.75, how much of that income is saved?

If a consumer spends $300 on goods and the marginal propensity to consume is 0.75, how much of that income is saved?

Step 1: Understand that the consumer spends $300 on goods.
Step 2: Know that the marginal propensity to consume (MPC) is 0.75. This means that for every dollar earned, 75 cents is spent on consumption.
Step 3: To find the total income, use the formula: Income = Consumption / MPC.
Step 4: Plug in the values: Income = 300 / 0.75.
Step 5: Calculate the income: 300 divided by 0.75 equals $400.
Step 6: Now, to find out how much is saved, use the formula: Savings = Income - Consumption.
Step 7: Plug in the values: Savings = 400 - 300.
Step 8: Calculate the savings: 400 minus 300 equals $100.

Marginal Propensity to Consume (MPC) – The proportion of additional income that a consumer spends on goods and services, which in this case is 0.75.
Income and Savings Relationship – Understanding how to calculate total income based on consumption and MPC, and how to derive savings from that income.