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CA Foundation · Business Economics · Determination of National Income

In a Keynesian consumption function C = a + bY, where a > 0 and 0 < b < 1, which statement about the average propensity to consume (APC) as income rises is correct?

APC falls as income rises but stays above MPC. Since APC equals a/Y plus b, the autonomous part a/Y shrinks as income grows, yet it never reaches zero, so APC remains greater than the MPC, which equals b.

  1. AAPC rises towards 1
  2. BAPC falls but stays above MPCCorrect
  3. CAPC remains constant and equal to MPC
  4. DAPC becomes less than MPC

Explanation

APC = C/Y = a/Y + b. As Y rises, a/Y falls, so APC declines. It always remains above b (the MPC) because a/Y is positive. The option saying APC rises is wrong because it ignores that the autonomous term is spread over a larger income.

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