Assume that in a given year, consumption and saving schedules are as given (columns 1 through 3 in billions of dollars). $$ \begin{array}{|c|c|c|} \hline \begin{array}{c} \text { (1) } \\ \text { Level of output and } \\ \text { income } \\ (\mathrm{NNP}=\mathrm{D} 1) \end{array} & \begin{array}{c} (2) \\ \text { Consumption } \end{array} & \begin{array}{c} (3) \\ \text { Saving } \end{array} \\ \hline \$ 510 & 480 & 30 \\ \hline 530 & 495 & 35 \\ \hline \end{array} $$ a) Determine the average propensity to consume \((\mathrm{APC})\) and the average propensity to save (APS). b) Compute the marginal propensity to consume (MPC) and the marginal propensity to save (MPS).

Step by step solution

01

Calculate APC (Average Propensity to Consume) for both Income levels

In order to calculate the APC, we will use the formula: APC = Consumption / Income. For Income level 1 (510): APC = \( \frac{480}{510} \) For Income level 2 (530): APC = \( \frac{495}{530} \)

02

Calculate APS (Average Propensity to Save) for both Income levels

In order to calculate the APS, we will use the formula: APS = Saving / Income. For Income level 1 (510): APS = \( \frac{30}{510} \) For Income level 2 (530): APS = \( \frac{35}{530} \)

03

Calculate MPC (Marginal Propensity to Consume)

In order to calculate the MPC, we will use the formula: MPC = Change in Consumption / Change in Income. Change in Consumption = Consumption level 2 - Consumption level 1 = \(495 - 480\) Change in Income = Income level 2 - Income level 1 = \(530 - 510\) MPC = \( \frac{Change \, in \, Consumption}{Change \, in \, Income} \)

04

Calculate MPS (Marginal Propensity to Save)

In order to calculate the MPS, we will use the formula: MPS = Change in Saving / Change in Income. Change in Saving = Saving level 2 - Saving level 1 = \(35 - 30\) Change in Income = Income level 2 - Income level 1 = \(530 - 510\) MPS = \( \frac{Change \, in \, Saving}{Change \, in \, Income} \)

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