The consumption function of an economy is given by dC/dY

Solution

Given: dC/dY = 0.8 − 0.004Y (MPC as a function of Y) Statement I — FALSE: MPC = 0.8 − 0.004Y is NOT constant — it varies with Y. Statement II — TRUE: As Y rises, MPC falls. This indicates a non-linear (quadratic) consumption function, consistent with Friedman/Kuznets findings that higher-income individuals save a greater fraction. Statement III — FALSE: Integrating: C = 0.8Y − 0.002Y² + A. The autonomous consumption A is a constant of integration whose sign CANNOT be determined from dC/dY alone — additional information (e.g., the value of C at Y = 0) is required. Statement IV — TRUE: MPC = 0 when Y = 200. For Y > 200, MPC < 0 (consumption falls as income rises). Mathematically valid from this function, though empirically unrealistic at normal income ranges.