Question

The ratio of consumption expenditure to income is called:

• A. Basic consumption
• B. Average propensity to consume
• C. Expected consumption
• D. Marginal propensity to consume

Hint:

"Average" relates to absolute values ($C/Y$), while "Marginal" always refers to incremental changes ($\Delta C/\Delta Y$). Keeping this distinction in mind prevents common errors.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
The consumption function in macroeconomics describes the relationship between total consumption expenditure and total disposable income.

Step 2: Detailed Explanation:
Let us mathematically define the options:
- Average Propensity to Consume (APC): This is the ratio of total consumption expenditure ($C$) to total income ($Y$). It indicates the percentage of income spent on consumption.
\[ \text{APC} = \frac{C}{Y} \]
- Marginal Propensity to Consume (MPC): This is the ratio of the change in consumption ($\Delta C$) to the change in income ($\Delta Y$).
\[ \text{MPC} = \frac{\Delta C}{\Delta Y} \]
Since the question asks for the direct ratio of consumption expenditure to income (without any changes), it is defined as the Average Propensity to Consume.

Step 3: Final Answer:
The ratio corresponds to the Average Propensity to Consume, matching Option (B).