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CA Foundation · Business Economics · Determination of National Income

In a simple Keynesian consumption function C = a + bY, where a > 0, which of the following statements about the average propensity to consume (APC) is correct as income rises?

APC falls as income rises and approaches b from above but never reaches it. Since APC = a/Y + b and the autonomous consumption a is positive, the term a/Y keeps shrinking with higher income yet remains positive, so APC always stays above the MPC b.

  1. AAPC rises steadily and eventually exceeds 1
  2. BAPC remains constant and equal to b
  3. CAPC falls and approaches b but stays above bCorrect
  4. DAPC falls and becomes lower than b

Explanation

APC = C/Y = a/Y + b. As Y rises, a/Y falls toward zero, so APC falls and approaches b from above. It never goes below b because a/Y stays positive. APC is constant only if a = 0, which is not the case here.

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