Question

Assume that autonomous consumption is \(1,625 billion and disposable income is \)11,500 billion. Calculate consumption expenditure if an increase of \(1,000 in

disposable income leads to an increase of \)750 in consumption expenditure

Short answer

Consumption Expenditure = 10250

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.

Consumption Function = a + b Yd; where Y = Disposable (after tax) Income

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. {Formula = Change in Consumption / Change in Income}

Numerical Solution 

As increase in disposable income by 1000 increases consumption expenditure by 750, so MPC = 750 / 1000 = 0.75

Autonomous Consumption = 1625 & Income = 11500 implies that :

Consumption = 1625 + 0.75 (11500) = 1625 + 8625

= 10250