Question

Read the following statements carefully: 
Statement 1: A consumption function describes the relationship between consumption and savings. 
Statement 2: Consumption function consists of two components---autonomous consumption and induced consumption. 
In the light of the given statements, choose the correct alternative from the following:

• A. Statement 1 is true and Statement 2 is false.
• B. Statement 1 is false and Statement 2 is true.
• C. Both Statements 1 and 2 are true.
• D. Both Statements 1 and 2 are false.

Hint:

The consumption function shows the relationship between income and consumption, not savings.

Answer 1

The Correct Option is B

Step 1: Analyze the provided statements.

Statement 1: Incorrect. The consumption function models the link between consumption and income, not savings.

Statement 2: Correct. The consumption function comprises two elements:

• Autonomous Consumption: The baseline consumption level at zero income.
• Induced Consumption: Consumption that fluctuates with income variations.