Data on before-tax income, taxes paid, and consumption spending for the Simpson family in various years are given below. (LO2)
Before-tax income ($)
Taxes paid ($)
Consumption spending ($)
a. Graph the Simpsons’ consumption function and find their household’s marginal propensity to consume.
b. How much would you expect the Simpsons to consume if their income was $32,000 and they paid taxes of $5,000?
c. Homer Simpson wins a lottery prize. As a result, the Simpson family increases its consumption by $1,000 at each level of after-tax income. (“Income” does not include the prize money.) How does this change affect the graph of their consumption function? How does it affect their marginal propensity to consume?