The average propensity to consume is the:

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BlackTom AI · Accepted Answer

Question restatement: The average propensity to consume is the:

Option a: "ratio of consumption to wealth." This is incorrect because the average propensity to consume (APC) relates consumption to income, not to wealth. Wealth is a stock measure, whereas APC uses flow variables; mixing wealth with income leads to a mischaracterization of what APC measures.

Option b: "amount consumed out of an additional dollar of income." This describes marginal propensity to consume (MPC), not the average propensity. MPC looks at the additional consumption arising from a small change in income, whereas APC is about the overall consumption share of total income.

Option c: "amount available for consumption after precautionary saving." This describes a particular budget concept or precautionary saving behavior, not the APC. APC uses actual or disposable income and consumption, not the residual after a saving buffer.

Option d: "ratio of consumption to income." This is the standard definition of the average propensity to consume: APC = C / Y, where C is consumption and Y is income. It measures what fraction of income is consumed on average.

Why the correct choice fits: The APC captures the overall tendency of income to be spent on consumption rather than saved, expressed as a proportion. It components into the broader macroeconomic framework of consumption behaviour and the income-consumption relationship. It is not concerned with wealth, nor with the incremental change in consumption from a change in income (which would be MPC), nor with post-saving disposable amounts.

Why the other options fail conceptually:
- A confuses the income-accumulation relationship (consumption-to-wealth ratio) with the income-to-consumption ratio.
- B confuses an average metric with a marginal metric; MPC is about changes in consumption per unit change in income, not the overall share.
- C conflates consumption with the residual after saving, effectively mixing up the framework of disposable income allocation with the APC definition.

In summary, only option d correctly defines the average propensity to consume as the ratio of consumption to income, aligning with standard macroeconomic terminology.

105A Ch 20 (Consumption) Homework

The average propensity to consume is the:

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