Consumption Function: Consider the following relationship between disposable income and consumption:
Income Consumption
0 $ 4,000
$ 10,000 $ 13,000
$ 20,000 $ 22,000
$ 30,000 $ 31,000
$ 40,000 $ 40,000
$ 50,000 $ 49,000
$ 60,000 $ 58,000
(a) find out the marginal propensity to consume
(b) describe how consumption can exceed income at certain income levels.
(c) Demonstrate graphically and describe in words how the following events either shift the consumption function or cause a movement along the same consumption function.
(i) A cut in income taxes leads to an increase in disposable income
(ii) Fear that a recession is about to begin.
(iii) Increased trade and globalization cause prices of consumer goods to fall.
(iv) The housing market hits hard times and prices of homes fall.