Question

During 1979, Mr. Anderson expected to earn $$\$ 20,000.$$ From this income he had planned to save $$\$ 2,000.$$ However, during 1979, Mr. Anderson got a raise which boosted his income to $$\$ 23,000$$. If Mr. Anderson ended up saving a total of $$\$ 3,000$$ out of his $$\$ 23,000$$ income, what was his marginal propensity to consume (MPC)? (It may be assumed that if he had not received his raise, Mr. Anderson would have actually saved the $$\$ 2,000$$ that he had planned to save.)

Short answer

The marginal propensity to consume (MPC) for Mr. Anderson is \(\frac{1}{3}\) or approximately 0.33. This means that for every additional dollar he earns, Mr. Anderson saves about 33 cents and spends the remaining 67 cents.

Step-by-step solution

Calculate the increase in income

Mr. Anderson's income increased from $$\$ 20,000$$ to $$\$ 23,000$$, so we calculate the increase in income by subtracting the initial income from the final income: Increase in income = Final income - Initial income = \( \$ 23,000 - \$ 20,000 \) = \( \$ 3,000 \)

Calculate the increase in saving

Mr. Anderson's savings increased from \( \$ 2,000 \) to \( \$ 3,000 \), so we calculate the increase in saving by subtracting the initial savings from the final savings: Increase in saving = Final saving - Initial saving = \( \$ 3,000 - \$ 2,000 \) = \( \$ 1,000 \)

Divide the increase in saving by the increase in income

To find the marginal propensity to consume (MPC), we need to divide the increase in saving by the increase in income: MPC = Increase in saving / Increase in income = \( \$ 1,000 / \$ 3,000 \) = \( \frac{1}{3} \) The marginal propensity to consume (MPC) for Mr. Anderson is \(\frac{1}{3}\) or approximately 0.33. This means that for every additional dollar he earns, Mr. Anderson saves about 33 cents and spends the remaining 67 cents.

Key concepts

Increase in Income

The concept of an increase in income is straightforward yet crucial in understanding how individual financial decisions shift. When Mr. Anderson received a raise, his income increased from \(\\(20,000\) to \(\\)23,000\). This represents a \(\\(3,000\) increase in income.
Income changes can have profound effects on both saving and consumption patterns. These patterns are often analyzed using the marginal propensity to consume (MPC), a vital economic measure which details the portion of additional income that is likely to be spent, rather than saved.

• This surplus income can lead to more spending on goods and services.
• Understanding income changes helps evaluate future financial behaviors.
• Analyzing income increases can aid in budgeting and forecasting.

For Mr. Anderson, the extra \(\\)3,000\) provided an opportunity to revise his financial plans for saving and spending. It serves as an excellent example of how income increments are fundamental elements in economics, affecting various aspects of personal finance decision-making.

Increase in Saving

When individuals experience an increase in income, like Mr. Anderson did, decisions on saving become pivotal. Mr. Anderson initially planned to save \(\\(2,000\) but ended up saving \(\\)3,000\) after his income boost
.
This represents an increase in saving by \(\$1,000\). Saving is an essential part of financial stability. It's about setting aside a portion of income for future use rather than expenditure.

• Increases in savings reflect a shift towards greater financial precaution.
• It indicates how confident individuals feel about their financial situation.
• More savings can lead to investments in assets or substantial purchases.

For Mr. Anderson, the savings increment suggests a calculated decision possibly driven by future goals or economic uncertainty. It's an insightful example demonstrating how income increases often lead to adjustments in saving strategies, showing the balance between consumption and financial prudence.

Consumption

Consumption refers to the spending pattern of individuals when they spend on goods and services from their disposable income. It is influenced by the amount of disposable income available after saving. In Mr. Anderson’s case, the \(\\(3,000\) income increase led to more consumption because he spent \(\\)2,000\) out of every \(\$3,000\) gained.

This aligns with the marginal propensity to consume, which was calculated as \(\frac{1}{3}\) (or approximately 0.33), indicating that for every additional dollar earned, 33 cents were saved, and 67 cents went towards consumption.

• Consumption highlights spending behavior in response to income changes.
• It impacts economic growth through demand for goods and services.
• Higher consumption rates can boost industries and employment.

Mr. Anderson’s spending decisions emphasize the dynamic between income increases and consumption needs. It ranges from satisfying immediate needs to fulfilling personal desires, underscoring its role as a driver of economic activity.