Consider the given consumption function of country X and answer the following question.

C = 100 + 0.8Y

What is the value of autonomous consumption (A) and marginal propensity to consume (MPC) in the given equation?

Correct Answer A = 100, MPC = 0.8

Key Points:

The consumption function you provided is in the form of a simple linear equation:

• C = A + MPC*Y

where:

• C represents consumption,
• A represents autonomous consumption,
• MPC represents the marginal propensity to consume, and
• Y represents income.

Comparing this with your given function C = 100 + 0.8Y, we can identify the values of A and MPC.

• A (Autonomous consumption) is part of consumption that occurs when income is zero.
• It's the intercept of the consumption function on the consumption axis.
• This is represented by the constant term in the equation, which in this case is 100.
• MPC (Marginal Propensity to Consume) is the change in consumption resulting from a one-unit change in income.
• It's the slope of the consumption function.
• In your given function, this is represented by 0.8.

So, in the given consumption function C = 100 + 0.8Y, autonomous consumption (A) is 100 and the marginal propensity to consume (MPC) is 0.8.