Question

Which of the following statements is incorrect about marginal and average propensity to save?

• A. Value of marginal propensity to save ranges from 0 to 1
• B. The sum of average propensity to save and marginal propensity to save is always equal to one
• C. At the break-even point, income and consumption are equal
• D. Value of average propensity to save rises with increase in income

Answer 1

The Correct Option is B

In economics, understanding marginal propensity to save (MPS) and average propensity to save (APS) is vital for analyzing income allocation between saving and consumption. Here's a breakdown and why the provided statement is inaccurate:

1. Marginal Propensity to Save (MPS): This measures the proportion of an additional unit of income that is saved. Its value is between 0 and 1, as any extra income is either consumed or saved.
2. Average Propensity to Save (APS): This is the ratio of total savings to total income. As income rises and basic needs are met, APS generally increases because a larger portion of income can be directed towards saving.
3. Break-even Point: This is the income level where consumption equals income, resulting in zero savings.
4. Explanation of the Incorrect Statement: The claim that "The sum of average propensity to save and marginal propensity to save is always equal to one" is false. The correct relationship is that the sum of the marginal propensity to consume (MPC) and MPS always equals one, as any given income unit is either consumed or saved. The sum of APC and APS is not necessarily one.

Concept	Formula	Range
MPS	\( \frac{\Delta S}{\Delta Y} \)	0 to 1
APS	\( \frac{S}{Y} \)	Can rise with income
MPC + MPS	= 1	Always

Therefore, the assertion that APS plus MPS consistently equals one is incorrect, and this makes it the correct choice for the question.