The income of an individual increases from N150 to N250 and his consumption rate increases from N100 to N150. Calculate the Marginal Propensity to Consume

Analyze the question

You are asked for the Marginal Propensity to Consume (MPC), given how consumption changes when income changes.

Concept

MPC measures how much of an extra naira of income is spent on consumption:

MPC = Change in Consumption (ΔC) ÷ Change in Income (ΔY)

Solution

• Change in income: ΔY = 250 − 150 = N100
• Change in consumption: ΔC = 150 − 100 = N50

MPC = ΔC ÷ ΔY = 50 ÷ 100 = 0.5

This means that for every extra N1 earned, the individual spends 50 kobo and saves the other 50 kobo (so MPS = 0.5 as well, and MPC + MPS = 1).

Checking the options

• A (2): this is ΔY ÷ ΔC, which is upside down.
• B (0.4): this does not come from the figures. Dividing 100 by 250 gives 0.4, which wrongly uses the original consumption over the new income.
• C (1): this would mean all extra income is spent, but only N50 of the N100 was.
• D (0.5): this matches our calculation.

Answer: D (0.5)

Exam tip: Always use the changes (differences) rather than the raw figures. MPC is "change in C over change in Y", and it should lie between 0 and 1 for ordinary cases. This lets you eliminate option A (2) right away.