Question

Read the following statements carefully: Statement 1: Constant rate of change of consumption (\(\Delta C\)) with respect to change in income (\(\Delta Y\)), is the reason for the straight-line consumption curve. Statement 2: Marginal rate of change between consumption and income is defined as Average Propensity to Consume (APC). (Choose the correct alternative)

• 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:

MPC measures the change in consumption due to a change in income, whereas APC measures total consumption as a percentage of total income.

Answer 1

The Correct Option is A

1. Statement 1 is accurate.
- The consumption curve is linear due to a constant Marginal Propensity to Consume (MPC), indicated by an unchanging \( \Delta C / \Delta Y \).
2. Statement 2 is inaccurate.
- The marginal change in consumption relative to income is defined as the Marginal Propensity to Consume (MPC), not the Average Propensity to Consume (APC).
- APC is computed as \( C/Y \) and represents the share of aggregate income allocated to consumption.
Conclusion:
Given that Statement 1 is true and Statement 2 is false, option (A) is the correct choice.