Q.If an upward sloping straight line consumption function makes an intercept at the Y-axis at a positive coordinate, it implies that Marginal Propensity to Consume (MPC) __________ and Average Propensity to Consume (APC) __________ as the income increases. (Choose the correct option to fill in the blanks) (A) remains constant, rises (B) rises, rises (C) remains constant, falls (D) falls, falls

The consumption function described is an upward sloping straight line with a positive Y-axis intercept. This implies a linear consumption function of the form $C = \bar{C} + bY$, where $C$ is consumption, $Y$ is income, $\bar{C}$ is autonomous consumption (the positive Y-axis intercept), and $b$ is the slope of the consumption function.

Marginal Propensity to Consume (MPC) is the change in consumption for a unit change in income, given by $MPC = \frac{\Delta C}{\Delta Y}$. In a linear consumption function $C = \bar{C} + bY$, the slope $b$ represents the MPC. Since the consumption function is a straight line, its slope $b$ is constant. Thus, MPC remains constant as income increases. …

The question describes a specific type of consumption function: an upward-sloping straight line with a positive intercept on the Y-axis. Understanding the implications of these characteristics for Marginal Propensity to Consume (MPC) and Average Propensity to Consume (APC) is key.

First, let's recall the general form of a linear consumption function:

The question states that the consumption function is an "upward sloping straight line."

• "Upward sloping" implies that as income ($Y$) increases, consumption ($C$) also increases, meaning the MPC ($b$) is positive.
• "Straight line" implies that the slope of the consumption function is constant.

Now, let's analyze MPC and APC based on this function.

Marginal Propensity to Consume (MPC)

MPC measures the change in consumption for a given change in income. It is the slope of the consumption function.

For a linear consumption function $C = \bar{C} + bY$, the slope is $b$. Since the function is a straight line, its slope is constant throughout. Therefore, the Marginal Propensity to Consume (MPC) remains constant as income increases.

Average Propensity to Consume (APC)

APC measures the ratio of total consumption to total income.

We can substitute the consumption function into the APC formula:

$APC = \frac{\bar{C} + bY}{Y}$

$APC = \frac{\bar{C}}{Y} + \frac{bY}{Y}$

$APC = \frac{\bar{C}}{Y} + b$

The question states that the consumption function makes an "intercept at the Y-axis at a positive coordinate." This means autonomous consumption ($\bar{C}$) is a positive value.

Now, consider what happens to APC as income ($Y$) increases:

• The term $\bar{C}$ is a positive constant.
• As $Y$ increases, the fraction $\frac{\bar{C}}{Y}$ will decrease (since the numerator is constant and positive, and the denominator is increasing).
• The term $b$ (MPC) remains constant, as established earlier. …