Explanation of MPC and its Calculation

The marginal propensity to consume (MPC) is a concept in economics that measures the change in consumption spending resulting from a change in disposable income. It represents the proportion of additional income that individuals choose to spend rather than save.

Calculation of MPC:
MPC can be calculated using the formula: MPC = Change in Consumption / Change in Disposable Income.

For example, if the change in consumption is $100 and the change in disposable income is $250, the MPC can be calculated as follows:
MPC = $100 / $250 = 0.4

Interpretation:
A MPC of 40% means that for every additional dollar of disposable income, individuals will spend 40 cents and save the remaining 60 cents.

Now, let's consider the question of what will be the MPC given an MPC of 40% and provide justification for the answer.

Answer:

Given that the MPC is 40%, it implies that for every additional dollar of disposable income, individuals will spend 40 cents. Therefore, the MPC remains constant at 40% regardless of the change in disposable income.

Justification:

The marginal propensity to consume (MPC) is a behavioral parameter that represents the spending habits of individuals. It indicates the proportion of additional income that individuals choose to spend rather than save. The MPC is influenced by various factors such as income levels, interest rates, consumer confidence, and government policies.

In this case, we are assuming a constant MPC of 40%. This assumption is based on the given information that the MPC is 40%. As long as the MPC remains constant and there are no changes in the factors influencing consumption behavior, the MPC will continue to be 40%.

It is important to note that the MPC is not fixed and can vary in different economic situations. For example, during periods of economic downturns or uncertainty, individuals may choose to save more and spend less, leading to a lower MPC. Conversely, during periods of economic growth and increased consumer confidence, individuals may be more inclined to spend, resulting in a higher MPC.

In conclusion, the MPC of 40% indicates that individuals will spend 40% of any additional income they receive. This assumption is valid as long as there are no significant changes in the factors influencing consumption behavior.