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Asked Oct 14, 2019
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How much more would you spend if you won a $1,000 lottery prize?  Why might your average and marginal propensities to consume differ?

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Expert Answer

Step 1

Marginal Propensity to Consume (MPC) refers to the change in consumption due to the change in income.

Average Propensity to Consume (APC) refers to the proportion of income that is spent on consumption.

Step 2

A $1,000 lottery will increase the level of income by $1,000. The increase in consumption due to an increase in income depends on the individual’s marginal propensity to consume.

Step 3

Suppose initial income is $10.000 and initial consumption is $6,000. If the co...

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300 ΔC ΔΥ 1,000 =0.3

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