What is the marginal propensity to consume (MPC) and why is it important in predicting consumer behavior?
What will be an ideal response?
The marginal propensity to consume is the ratio of the change in consumption spending to the change in disposable income. The value of the MPC typically is less than one because when consumers receive an increase in income, their spending does not increase as much as income. For the United States, statistical estimates yield an MPC of approximately 0.95. If one knows the MPC, then predictions can be made of how much consumer spending will increase when disposable income increases by a certain amount. This is especially useful with regard to tax changes. If the federal government intends to increase aggregate demand through decreasing taxes, then knowing the MPC is necessary. For example, if the desired increase in consumer spending is $475 million and the MPC is 0.95, then taxes must be reduced by $500 million.
You might also like to view...
The above figure illustrates the market for corn. If point "a" represents the original equilibrium and point "b" the new equilibrium, which of the following could have caused the change?
A) a decrease in the number of corn growers B) a decrease the price of wheat, a substitute in production for corn C) an increase in the cost of the seed used to grow the corn D) a decrease in buyers' incomes if corn is an inferior good E) an increased belief among buyers that corn is healthy
In the model of monopolistic competition, compared to a firm with a higher marginal cost, a firm with a lower marginal cost will set a ________ price, produce ________ output, and earn ________ profits
A) lower; more; more B) higher; more; more C) lower; less; less D) higher; less; less E) higher; less; more
In which of these markets would the firms be facing the least elastic demand curve?
A) perfect competition B) pure monopoly C) monopolistic competition D) oligopoly
The principal-agent problem arises because the agent's objectives differ from those of the principal
a. True b. False