The consumption function of an economy is: C = 40 + 0.8 Y (amount in ₹ crores). Determine that level of income

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Q. The consumption function of an economy is: C = 40 + 0.8 Y (amount in ₹ crores). Determine that level of income where average propensity to consume will be one.

(OR)

Which of the two, average propensity to consume or average propensity to save, can be negative and why?

Haryana BsehCBSE Class XII Board 2019Subjective· 3mImportance★★★★★

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Part (a)Concept understanding — Marginal Propensity to Consume

Marginal Propensity to Consume (MPC)

Start with everyday intuition

Think about what happens when you get some extra money — say, a ₹500 bonus from your part-time job, or a cash gift on your birthday. You don't save all of it, and you don't spend all of it either. Most people spend a part and save the rest. That part you spend — the fraction of the extra income that goes into consumption — is exactly what economists call the Marginal Propensity to Consume.

The word "marginal" here means "extra" or "additional." So MPC answers one simple question: Out of every extra rupee you earn, how much do you spend?

The precise meaning

Formally, MPC is the ratio of change in consumption expenditure to the change in income that brought it about.

MPC = \frac{\Delta C}{\Delta Y}

For example, if your income rises by ₹1,000 and your consumption rises by ₹750, your MPC is $750/1000 = 0.75$ (or 75%). This means you spend 75 paise of every extra rupee and save the remaining 25 paise.

The other side of the coin is the Marginal Propensity to Save (MPS) — the fraction of extra income that is saved. Since every extra rupee is either spent or saved:

MPC + MPS = 1

This is not a theory; it's an accounting identity. If MPC = 0.75, then MPS must be 0.25.

Why MPC matters

MPC is not just a number — it is the engine of the multiplier effect, one of the most powerful ideas in macroeconomics.

When someone spends money, that spending becomes someone else's income. That second person, in turn, spends a fraction (their MPC) of that income, which becomes a third person's income, and so on. A single initial injection of spending — say, government investment in a road — ripples through the economy, generating total income many times larger than the original spending.

The size of this ripple depends directly on MPC. The higher the MPC, the larger the multiplier.

Multiplier\ (k) = \frac{1}{1 - MPC} = \frac{1}{MPS}

If MPC = 0.8, the multiplier is $1/(1-0.8) = 5$ . An initial ₹100 crore investment can generate ₹500 crore of total income. If MPC = 0.5, the multiplier is only 2.

A word on the diagram …

Part (b)Concept understanding — Marginal Propensity to Consume

Marginal Propensity to Consume (MPC)

Start with everyday intuition

The word "marginal" here means "extra" or "additional." So MPC answers one simple question: Out of every extra rupee you earn, how much do you spend?

The precise meaning

Formally, MPC is the ratio of change in consumption expenditure to the change in income that brought it about.

MPC = \frac{\Delta C}{\Delta Y}

The other side of the coin is the Marginal Propensity to Save (MPS) — the fraction of extra income that is saved. Since every extra rupee is either spent or saved:

MPC + MPS = 1

This is not a theory; it's an accounting identity. If MPC = 0.75, then MPS must be 0.25.

Why MPC matters

MPC is not just a number — it is the engine of the multiplier effect, one of the most powerful ideas in macroeconomics.

The size of this ripple depends directly on MPC. The higher the MPC, the larger the multiplier.

Multiplier\ (k) = \frac{1}{1 - MPC} = \frac{1}{MPS}

If MPC = 0.8, the multiplier is $1/(1-0.8) = 5$ . An initial ₹100 crore investment can generate ₹500 crore of total income. If MPC = 0.5, the multiplier is only 2.

A word on the diagram …

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Part (a): APC = 1 when C = Y; solving $40 + 0.8Y = Y$ gives $Y = ₹200$ crores.

Part (b): APS can be negative (dissaving at low income); APC is always positive.

Part (a)

The Average Propensity to Consume (APC) is the ratio of total consumption to total income.

APC = \dfrac{C}{Y}

When $APC = 1$ , all income is consumed, so $C = Y$ and saving $S = 0$ . This is the break-even point.

Substituting the given consumption function $C = 40 + 0.8Y$ (autonomous consumption $40$ , MPC $0.8$ ) and setting $C = Y$ :

Y = 40 + 0.8Y

Y - 0.8Y = 40

0.2Y = 40

$Y = \frac{40}{0.2} = 200$ …

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

BSEH Haryana Senior Secondary Class 12 (Commerce) 2026Set ANNUAL1 markMCQ
$Q. If Marginal Propensity to Consume (MPC) is equal to 1, then the multiplier will be :$
(a) Zero
(b) One
(c) Two
(d) Infinite
›Reveal solutionSolution

MPC = 1 makes K = 1/(1 − 1) = infinite.

The investment multiplier is K = change in income / change in investment = 1/(1 − MPC) = 1/MPS.

…

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BSEH Haryana Senior Secondary Class 12 (Commerce) 2026Set ANNUAL1 markMCQ
$Q. If MPS = 0.5, then what will be the value of the multiplier?$
(a) 2
(b) 2.5
(c) 3
(d) 3.5
›Reveal solutionSolution

K = 1/MPS = 1/0.5 = 2.

The investment multiplier K = 1/(1 − MPC) = 1/MPS, where MPS is the marginal propensity to save.

…

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BSEH Haryana Senior Secondary Class 12 (Commerce) 2026Set ANNUAL1 markMCQ
$Q. Assertion (A) : The value of Multiplier is determined by the Marginal Propensity to Consume. Reason (R) : Higher the value of Marginal Propensity to Consume (MPC), the lower will be value of the multiplier.$
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.
(d) Assertion (A) is false, but Reason (R) is true.
›Reveal solutionSolution

A true, R false: higher MPC means higher multiplier.

The multiplier K = 1/(1 − MPC). So the value of the multiplier is indeed determined by the marginal propensity to consume — Assertion (A) is true.

…

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CA Foundation 2025Set may-20251 markMCQ
$Q. Under the Keynesian theory of determination of national income, the assumption is that the consumption increases with an increase in disposable income but the increase in consumption will be _______ the increase in disposable income. (A) Equal to (B) Opposite to (C) Greater than (D) Less than$
›Reveal solutionSolution

By Keynes's fundamental psychological law, a rise in income raises consumption by less than the rise in income.

Step 1 — Keynes's psychological law of consumption

Keynes held that as disposable income increases, consumption increases too, but not by the full amount of the increase — people save a part of the additional income.

Step 2 — Express with MPC

The marginal propensity to consume measures the share of extra income that is consumed:
$MPC = \frac{\Delta C}{\Delta Y}, \qquad 0 < MPC < 1$
Since $MPC < 1$ , the change in consumption $\Delta C$ is less than the change in disposable income $\Delta Y$ . …
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CA Foundation 2025Set may-20251 markMCQ
$Q. Which of the following is true in respect of relation of Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS) as per the Keynesian theory of determination of National Income ? (A) MPC = MPS (B) MPC + MPS = 1 (C) MPC + MPS = 0 (D) No relation exists between MPC and MPS$
›Reveal solutionSolution

Because extra income is either spent or saved, MPC + MPS = 1.

Step 1 — Split additional income

A change in disposable income ( $\Delta Y$ ) is divided between a change in consumption ( $\Delta C$ ) and a change in saving ( $\Delta S$ ):
$\Delta Y = \Delta C + \Delta S$
Step 2 — Divide through by $\Delta Y$
$\frac{\Delta C}{\Delta Y} + \frac{\Delta S}{\Delta Y} = 1 \;\Rightarrow\; MPC + MPS = 1$
So the two marginal propensities always sum to one, and MPS = 1 − MPC.

Why the other options are wrong: (A) MPC = MPS only in the special case where each equals 0.5; it is not a general rule. (C) MPC + MPS = 0 is impossible, since both are non-negative and their sum is 1. (D) A definite relation clearly exists, so 'no relation' is wrong. …
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BSEH Haryana Senior Secondary Class 12 (Commerce) 2025Set ANNUAL1 markMCQ
$Q. If MPC = 0, then value of multiplier (K) is :$
(a) = 1
(b) = 0
(c) = 2
(d) Do not classified
›Reveal solutionSolution

MPC = 0 gives K = 1/(1 − 0) = 1.

K = 1/(1 − MPC). If MPC = 0, the whole of any additional income is saved and none is re-spent, so there are no further rounds of spending. K = 1/(1 − 0) …

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BSEH Haryana Senior Secondary Class 12 (Commerce) 2024Set ANNUAL1 markMCQ
$Q. Choose the correct formula :$
(a) APC = ΔC / ΔY
(b) APC = ΔY / ΔC
(c) APC = Y / C
(d) APC = C / Y
›Reveal solutionSolution

APC = C/Y.

Average propensity to consume (APC) is the proportion of total income spent on consumption: APC = Consumption / Income = C/Y. (The option ΔC/ΔY is the marginal …

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BSEH Haryana Senior Secondary Class 12 (Commerce) 2023Set ANNUAL1 markMCQ
$Q. Average consumption propensity =$
(a) C/Y
(b) ΔC/ΔY
(c) ΔY/ΔC
(d) Y/C
›Reveal solutionSolution

APC = C/Y.

Average propensity to consume (APC) is the proportion of total income devoted to consumption: APC = C/Y. (ΔC/ΔY is the marginal prop …

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BSEH Haryana Senior Secondary Class 12 (Commerce) 2020Set ANNUAL1 mark
$Q. Fill in the blank : Value of multiplier = ............. ( 1 / (1 - MPC) / 1 / MPC ).$
›Reveal solutionSolution

Multiplier K = 1/(1 − MPC) = 1/MPS.

The investment multiplier K shows by how many times income rises for a given rise in investment. It equals the reciprocal of (1 − MPC): K = 1/(1 − MPC). Since 1 − MP …

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Q.The consumption function of an economy is: C = 40 + 0.8 Y (amount in ₹ crores). Determine that level of income where average propensity to consume will be one.

Part (a)

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