Q.Read the following statements carefully : Statement 1: Constant rate of change of consumption (ΔC) with respect to change in income (ΔY), is the reason for the straight line consumption curve. Statement 2: Marginal rate of change between consumption and income is defined as Average Propensity to Consume (APC). In the light of the given statements, choose the correct alternative from the following : (A) Statement 1 is true and Statement 2 is false. (B) Statement 1 is false and Statement 2 is true. (C) Both Statements 1 and 2 are true. (D) Both Statements 1 and 2 are false.

The consumption function $C = \bar{C} + bY$ plots as a straight line when the marginal propensity to consume $b$ is constant. Statement 1 claims that a constant rate of change of consumption with respect to income — which is precisely $\frac{\Delta C}{\Delta Y}$, the MPC — produces a straight line consumption curve. This is correct. When MPC is constant, the slope of the consumption curve remains the same at every income level, yielding a linear relationship. …

The consumption function in macroeconomics relates household consumption expenditure to national income. Understanding its shape and the concepts that govern it requires clarity on two fundamental measures: the Marginal Propensity to Consume and the Average Propensity to Consume.

Why the consumption curve is a straight line

The consumption function is typically written as:

where $C$ is consumption, $\bar{C}$ is autonomous consumption (consumption when income is zero), $b$ is the MPC, and $Y$ is income.

When we say the consumption curve is a straight line, we mean it graphs as a linear relationship between $C$ and $Y$. Any straight line has a constant slope. The slope of the consumption function is precisely $\frac{\Delta C}{\Delta Y}$ — the change in consumption per unit change in income. This ratio is the Marginal Propensity to Consume (MPC).

If MPC is constant (say, always $0.8$), then every additional rupee of income generates the same additional consumption (80 paise). Geometrically, this constant rate of change produces a straight line. If MPC varied — rising or falling as income changed — the consumption curve would bend, becoming convex or concave.

Statement 1 is therefore true. A constant $\frac{\Delta C}{\Delta Y}$ is exactly what makes the consumption curve linear.

The marginal rate of change: MPC, not APC

Now consider Statement 2. It claims that "the marginal rate of change between consumption and income is defined as Average Propensity to Consume."

The marginal rate of change is, by definition, the derivative or the ratio of small changes: $\frac{\Delta C}{\Delta Y}$. This is the Marginal Propensity to Consume (MPC), not the Average Propensity to Consume.

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