Textbook Problem

(Consumption) Use the following data to answer the questions below:

Consumption
Real Disposable	Expenditures	Saving
Income | billions)	(billions)	(billions)
$100	$150	$
$200	S200
$300$400	$250$300

1. Graph the consumption function, with consumption spending on the vertical axis and disposable income on the horizontal axis.
2. If the consumption function is a straight line, what is its slope?
3. Fill in the saving column at each level of income. If the saving function is a straight line, what is its slope?

To determine

Based on the data, Graphical representation of consumption function, with consumption spending on vertical axis and disposable income on horizontal axis.

Explanation of Solution

(a) − Following graph shows the consumption function in an economy.

  

Sub- Part

Economics Concept Introduction

Introduction: Consumption function represents the functional relationship between total consumption and gross national income. Consumer spending depends on three factors: disposable income (Yd), autonomous consumption (a), i.e. when income is zero, and induced income (b), i.e. the percentage of extra income that is spent. The formula for the same is C = a + b*Yd.

To determine

Based on the data, to find:

Slope, if consumption function is a straight line

Explanation of Solution

In case of a straight line, slope of the line remains constant or same everywhere along the line. So, if the consumption function is a straight line then its slope will remain same everywhere along it. The difference between two level of income and consumption will be constant. The slope of consumption function can be calculates as follows −

  

  

  

Thus, the slope of given consumption function is 0.5.

Sub- Part

Economics Concept Introduction

Introduction: Consumption function represents the functional relationship between total consumption and gross national income. Consumer spending depends on three factors: disposable income (Yd), autonomous consumption (a), i.e. when income is zero, and induced income (b), i.e. the percentage of extra income that is spent. The formula for the same is C = a + b*Yd.

To determine

Based on the data,

Find the Savings at each level of income and the slope when the saving function is a straight line.

Explanation of Solution

If the saving function is a straight line then its slope will remain constant. Difference between two level of income and saving will remain constant along the saving function. As saving function is a straight line, change in saving and income would be the same. Thus, the slope of saving function would be:

  

  

  

Real Disposable Income (in billion $)	Consumption Expenditure (in billion $)	Savings (in billion $)
100	150	-50
200	200	0
300	250	50
400	300	100

Economics Concept Introduction

Introduction: Consumption function represents the functional relationship between total consumption and gross national income. Consumer spending depends on three factors: disposable income (Yd), autonomous consumption (a), i.e. when income is zero, and induced income (b), i.e. the percentage of extra income that is spent. The formula for the same is C = a + b*Yd.