The Marginal Propensity to Consume (MPC) Calculation Problem

In economics, understanding the concept of Marginal Propensity to Consume (MPC) is crucial for analyzing consumer behavior and spending patterns. Let's solve a problem related to MPC:

If disposable income increases by $5 billion and consumer spending increases by $4 billion, the marginal propensity to consume is equal to:

A) 1.25.
B) 9.
C) 0.8.
D) 20.

Final answer: The Marginal Propensity to Consume (MPC) is calculated by dividing the change in consumption ($4 billion) by the change in disposable income ($5 billion), resulting in a MPC of 0.8. Therefore, for every additional dollar of disposable income, consumers will spend 80 cents.

Explanation: MPC can be calculated by taking the change in consumption and dividing it by the change in disposable income. In this case, the change in consumption is $4 billion and the change in disposable income is $5 billion. Therefore, the formula to calculate MPC is:
MPC = Change in Consumption / Change in Disposable Income = $4 billion / $5 billion = 0.8
Therefore, the correct answer is C) 0.8, indicating that for each additional dollar of disposable income, consumers will spend 80 cents.