Read the following statements : Assertion (A) and Reason (R). Choose the correct alternative given below : Ass

Question 45 of 104

Q. Read the following statements : Assertion (A) and Reason (R). Choose the correct alternative given below : Assertion (A) : Before reaching the Break-Even level of income, the value of Average Propensity to Consume (APC) is greater than one. Reason (R) : The Average Propensity to Consume (APC) is the ratio of the total consumption and total income. Alternatives : (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 and Reason (R) is false. (D) Assertion (A) is false and Reason (R) is true.

West Bengal WbchseCBSE Class XII Board 2023MCQ· 1mImportance★★★★★

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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 …

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Both the Assertion (APC > 1 before break-even) and the Reason (APC is C/Y) are true, but the Reason is a definition and does not explain why APC is greater than one in that specific scenario.

In macroeconomics, understanding how households allocate their income between consumption and saving is crucial. Two key concepts that help us analyse this are the Average Propensity to Consume (APC) and the Break-Even level of income.

Let's first address the Reason (R) provided: "The Average Propensity to Consume (APC) is the ratio of the total consumption and total income." This statement is fundamentally correct. The Average Propensity to Consume (APC) is indeed defined as the proportion of total income that is spent on consumption. It is calculated by dividing total consumption (C) by total income (Y).

APC = \frac{C}{Y}

Now, let's turn our attention to the Assertion (A): "Before reaching the Break-Even level of income, the value of Average Propensity to Consume (APC) is greater than one." To understand this, we must first define the 'Break-Even level of income'. This is a specific point where an individual's or an economy's total consumption is exactly equal to its total income. At this level, there is no saving, nor is there any dissaving (spending more than income). In other words, at the break-even point, $C = Y$ .

Consider what happens before this break-even level of income is reached. At very low levels of income, or even zero income, individuals or households still need to consume a certain minimum amount to survive. This is known as autonomous consumption. Since income is low or non-existent, this consumption must be financed by borrowing or drawing down past savings, which is called dissaving. In such a situation, total consumption (C) is greater than total income (Y).

Important

When consumption (C) is greater than income (Y), it implies that $C/Y$ will be greater than 1. Since APC is defined as $C/Y$ , it follows that before the break-even level of income, the APC will be greater than one. This means Assertion (A) is true. …

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

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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