Consider the following table for a​ household's consumption expenditures and disposable income.

Question

income:0, 100, 200, 300, 400, 500
consumpption: 100, 165, 230, 295, 360, 425
Saving: ?, ?, ?, ?, ?, ?
To the nearest​ dollar, compute desired saving at each level of disposable income.

Answer 1

To calculate the saving at each level of disposable income, we need to subtract the consumption expenditures from the disposable income.

income: 0, 100, 200, 300, 400, 500
consumption: 100, 165, 230, 295, 360, 425
saving: -100, -65, -30, 5, 40, 75

The saving is negative for the first 3 levels of income, indicating that the household is borrowing or using up savings to cover expenses. At an income of $400, the savings become positive, indicating that the household is saving money. The saving increases with each level of income.

Answer 2

b. The marginal propensity to save is

Answer 3

To calculate the marginal propensity to save, we need to find the change in saving divided by the change in disposable income.

Change in saving = Saving at a certain level of disposable income - Saving at the previous level of disposable income
Change in disposable income = Disposable income at a certain level - Disposable income at the previous level

Using this formula, we can calculate the marginal propensity to save at each level of disposable income.

Level 1:
Change in saving = -65 - (-100) = 35
Change in disposable income = 100 - 0 = 100
Marginal propensity to save = Change in saving / Change in disposable income = 35 / 100 = 0.35

Level 2:
Change in saving = -30 - (-65) = 35
Change in disposable income = 200 - 100 = 100
Marginal propensity to save = Change in saving / Change in disposable income = 35 / 100 = 0.35

Level 3:
Change in saving = 5 - (-30) = 35
Change in disposable income = 300 - 200 = 100
Marginal propensity to save = Change in saving / Change in disposable income = 35 / 100 = 0.35

Level 4:
Change in saving = 40 - 5 = 35
Change in disposable income = 400 - 300 = 100
Marginal propensity to save = Change in saving / Change in disposable income = 35 / 100 = 0.35

Level 5:
Change in saving = 75 - 40 = 35
Change in disposable income = 500 - 400 = 100
Marginal propensity to save = Change in saving / Change in disposable income = 35 / 100 = 0.35

The marginal propensity to save remains constant at 0.35 at each level of disposable income. This means that for every additional dollar of disposable income, the household increases its saving by 0.35 dollars.

Answer 4

c. The marginal propensity to save plus the marginal propensity to consume must equal

Answer 5

The marginal propensity to save plus the marginal propensity to consume must equal 1.

In this case, we have already determined the marginal propensity to save to be 0.35 (or 35%). To find the marginal propensity to consume, we can subtract the marginal propensity to save from 1.

Marginal propensity to consume = 1 - Marginal propensity to save
Marginal propensity to consume = 1 - 0.35
Marginal propensity to consume = 0.65 (or 65%)

Therefore, the marginal propensity to save plus the marginal propensity to consume equals 0.35 + 0.65 = 1.