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?

Jharkhand JacCBSE 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.

JAC Jharkhand Intermediate Class 12 (Commerce) 2026Set ANNUAL1 markMCQ
$Q. If the consumption expenditure of consumers remains unchanged due to change in income, then what will be the value of MPC?$
(a) Greater than 1
(b) 1
(c) 0
(d) Less than 0
›Reveal solutionSolution

Unchanged consumption with changing income → MPC = 0.

The marginal propensity to consume MPC = ΔC/ΔY (change in consumption ÷ change in income). If consumption remains unchanged when income changes, the …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2026Set ANNUAL1 markMCQ
$Q. Which one is true?$
(a) MPC + MPS = 1
(b) MPC + MPS > 1
(c) MPC + MPS < 1
(d) MPC + MPS = 0
›Reveal solutionSolution

MPC + MPS = 1.

Any additional income (ΔY) is either consumed (ΔC) or saved (ΔS): ΔY = ΔC + ΔS. Dividing by ΔY gives ΔC/ΔY + ΔS/ΔY = 1, i.e. MPC + MPS = 1. So the two marg …

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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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JAC Jharkhand Intermediate Class 12 (Commerce) 2025Set ANNUAL1 markMCQ
$Q. What is called the ratio of change in investment and change in income called?$
(a) Marginal Propensity to Consume (MPC)
(b) Multiplier
(c) Average Propensity to Consume (APC)
(d) All of these
›Reveal solutionSolution

The ratio connecting a change in investment and the change in income is the multiplier.

The investment multiplier (k) shows the relationship between a change in investment and the resulting change in national income: k = ΔY / ΔI. An initial increase in investment raises income by a multiple of itself through successive rounds of spending. Hence the ratio conn …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2025Set ANNUAL1 markMCQ
$Q. If Marginal Propensity to Consume (MPC) in an economy is 0.6, then what will be the value of Marginal Propensity to Save (MPS)?$
(a) 0.6
(b) 0.4
(c) 2.5
(d) 1.7
›Reveal solutionSolution

MPS = 1 − MPC = 1 − 0.6 = 0.4.

Since income is either consumed or saved, the marginal propensity to consume and the marginal propensity to save always add up to one: MPC + MPS …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2024Set ANNUAL1 markMCQ
$Q. The marginal propensity to consume measures the slope of which function?$
(a) Production function
(b) Investment function
(c) Utility function
(d) Consumption function
›Reveal solutionSolution

MPC is the slope of the consumption function.

The marginal propensity to consume (MPC = ΔC/ΔY) measures the change in consumption resulting from a change in income. Graphically, this is the slope of the consumption function C = A + bY, where b …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2024Set ANNUAL1 markMCQ
$Q. If the value of the multiplier in an economy is 4, then what will be the value of the marginal propensity to save?$
(a) 0.25
(b) 0.75
(c) 2.5
(d) 4
›Reveal solutionSolution

MPS = 1/multiplier = 1/4 = 0.25.

The investment multiplier k = 1/MPS, so MPS = 1/k. Here the multiplier k = 4, so MPS = 1/4 = 0.25. (Check: MPC = 1 − …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2023Set ANNUAL1 markMCQ
$Q. The autonomous consumption in the consumption function C = A + bY is$
(a) C
(b) A
(c) B
(d) bY
›Reveal solutionSolution

In C = A + bY, 'A' is autonomous consumption.

In the consumption function C = A + bY: A is the autonomous consumption (consumption even when income is zero), b is the marginal propensity to consume (slope), and bY is the inc …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2023Set ANNUAL1 markMCQ
$Q. If the value of MPS in an economy is 0.2, then what will be the value of multiplier?$
(a) 0.4
(b) 5
(c) 2.5
(d) 4
›Reveal solutionSolution

Multiplier = 1/MPS = 1/0.2 = 5.

The investment multiplier is the reciprocal of the marginal propensity to save: k = 1/MPS = 1/(1 − MPC). Here MPS = 0.2, so k = 1/0.2 = 5. This means an initial inc …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2023Set ANNUAL1 markMCQ
$Q. Investment multiplier is$
(a) 1/MPS
(b) 1/(1 - MPC)
(c) Both
(1) and
(2)
(d) None of these
›Reveal solutionSolution

The investment multiplier equals both 1/MPS and 1/(1 − MPC).

The multiplier k = 1/MPS. Since MPC + MPS = 1, we have MPS = 1 − MPC, so k can equally be written as 1/(1 − MPC). Both expressions ar …

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JAC Jharkhand Intermediate Class 12 (Commerce) 2020Set ANNUAL1 markMCQ
$Q. APC + APS = ?$
(a) 0
(b) 1
(c) ∞
(d) None of these
›Reveal solutionSolution

APC + APS = 1.

Average Propensity to Consume (APC) = C/Y and Average Propensity to Save (APS) = S/Y. Since national income is either consumed or saved (Y = C + S), dividing both sides by Y gives C/Y + S/Y = 1, …

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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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