Suppose the national income is rs.100 crore and the consumption expenditure is rs. 70 crore. What is the value of average propensity to save? What will be the value of marginal propensity to consume if the incomerises to rs.120 crore and consumption expenditure rises to rs. 100 crore?

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Answer

Answer:

Average Propensity to Save

- Average propensity to save (APS) is the proportion of national income that is saved by the economy on average.
- APS = Savings / National Income
- Here, National Income = Rs. 100 crore and Consumption Expenditure = Rs. 70 crore
- Therefore, Savings = National Income - Consumption Expenditure = Rs. 30 crore
- APS = Savings / National Income = 30/100 = 0.3 or 30%

Therefore, the value of average propensity to save is 30%.

Marginal Propensity to Consume

- Marginal propensity to consume (MPC) is the proportion of additional income that is spent on consumption.
- MPC = Change in Consumption Expenditure / Change in National Income
- Here, the change in national income is Rs. 20 crore (120 - 100) and the change in consumption expenditure is Rs. 30 crore (100 - 70).
- Therefore, MPC = 30/20 = 1.5

Therefore, the value of marginal propensity to consume is 1.5.

Explanation

- Average propensity to save is the proportion of income that is saved by the economy on average. In the given scenario, the national income is Rs. 100 crore and the consumption expenditure is Rs. 70 crore. Therefore, the savings are Rs. 30 crore. The APS is thus 30/100 = 0.3 or 30%.
- Marginal propensity to consume is the proportion of additional income that is spent on consumption. As the income increases from Rs. 100 crore to Rs. 120 crore, the consumption expenditure increases from Rs. 70 crore to Rs. 100 crore. Therefore, the change in national income is Rs. 20 crore and the change in consumption expenditure is Rs. 30 crore. The MPC is thus 30/20 = 1.5.
- The MPC is greater than zero and less than one, indicating that a part of the additional income is saved and a part is spent on consumption. The value of MPC greater than one is not possible as it would mean that the consumption expenditure has increased more than the increase in income, which is not possible.

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