Question

Calculate the value of the consumption function at each level of income in the following table if autonomous consumption = 300, taxes = 200, and mpc = 0.9.

Short answer

Disposable Income = -200, -100, 0, 100, 200, 300, 400

Consumption = 120, 210, 300, 390, 480, 570, 660

Step-by-step solution

Step 1. Introduction

Consumption function shows the corresponding values of consumption at various levels of income, by a functional relationship between income & consumption.

Disposable Income is the final income left to be used or saved, after giving tax & other compulsory legal deductions.

Consumption Function = a + b (Y - t) ; where -

a = autonomous consumption, ie consumption at zero level of income

b = marginal propensity to consume, ie ratio showing responsive change in consumption due to change in income

Y - t = Disposable income , after deducting tax 't' from income levels 'Y'

Numerical Solution 

Income Y	Disposable Income Yd	Consumption C
0	0 - 200 = -200	300 + 0.9 (-200) = 120
100	100 - 200 = -100	300 + 0.9 (-100) = 210
200	200 - 200 = 0	300 + 0.9 (0) = 300
300	300 - 200 = 100	300 + 0.9 (100) = 390
400	400 - 200 = 200	300 + 0.9 (200) = 480
500	500 - 200 = 300	300 + 0.9 (300) = 570
600	600 - 200 = 400	300 + 0.9 (400) = 660