Question

The consumption function of an economy is given by dC/dY = 0.8 − 0.004Y. Consider the following statements: (

Q: Answer-The consumption function of an economy is given by dC/dY = 0.8 − 0.004Y. Consider the following stat...

Given dCdY 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 FriedmanKuznets findings that higher-income individuals save a greater fraction. Statement III FALSE Integrating C 0.8Y 0.002Y A. The autonomous consumption A is a constant of integration whose sign CANNOT be determined from dCdY 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 lt 0 consumption falls as income rises. Mathematically valid from this function, though empirically unrealistic at normal income ranges.