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Question on Cambridge International economics exam - consumption function

  • 16-10-2022 8:37pm
    Registered Users Posts: 11,580 ✭✭✭✭ Geuze

    Somebody asked me my opinion on what is the answer to this MCQ in the 2014 Cambridge International Advanced Level exam:

    I am a bit confused.

    The simple version of a consumption function is:

    C = f (Y)

    C = C(autonomous) + (MPC) (Y)

    So the intercept is autonomous consumption, and the slope is the MPC.

    In a more advanced version, with taxes and benefits spending added in, the C function becomes:

    C = C(autonomous) + MPC (disp Y)

    C = C(auto) + MPC (Y + social benefits - direct taxes)

    If the UN benefit payment is increased, how will it affect the function?


  • Registered Users Posts: 962 ✭✭✭ Economics101

    Sorry not to answer your query, but the question as posed is dreadful rubbish. Sure, Consumption is a function of Income, but the labelling of the X-axis as National Income is plain wrong. It should be Personal Disposable Income if anything. And then the question: "If the UN benefit payment is increased, how will it affect the function? " is not very clear. it might affect consumption, but not the function itself.