Graphing consumption function and fiding marginal propensity to consume.
Consider the following data :
|
Year
|
Real Disposable Income
|
Real Consumption
|
|
0
|
20,000
|
14,000
|
|
1
|
30,000
|
19,000
|
|
2
|
40,000
|
24,000
|
For now, assume that no other variable (besides real disposable income) that could affect real consumption has changed between Year 0, Year 1, and Year 2.
a) Use the above data to draw a consumption function.
b) Illustrate what is the marginal propensity to consume.
c) What is the slope of the consumption function (you should give a numerical answer, not a formula)?
d) What is the formula for the consumption function (using C and DI as the variables)? Give autonomous consumption as well.
Suppose the government provides a $300 (in real dollars) tax rebate.
e) Will the rebate lead to a movement along or to a shift of the consumption function?
f) Using the data listed at the beginning of the problem as a guide, solve for the new level of real consumption in Year 2. Hint: Use the Real Consumption figure for year 2, and add/subtract the change in C
g) Suppose that, at the beginning of Year 3, citizens change their belief about their future income. In particular, they believe that they will have less future income. Show (on a graph) the position of Year 3's consumption function in relation to the function you drew in a). You do not need to show the exact amount of the shift (if any).