Question : The consumption function shows the relationship between:
Option 1: Saving and income
Option 2: Consumption and saving
Option 3: Consumption and investment
Option 4: Consumption and income
Correct Answer: Consumption and income
Solution : The correct answer is (d) Consumption and income
The consumption function represents the relationship between the level of consumption and the level of income in an economy. It describes how changes in income affect consumption behavior. The consumption function typically takes the form of a mathematical equation or a graph, showing the relationship between disposable income (income after taxes) and consumption expenditure.
According to the consumption function, as income increases, consumption also tends to increase, but not at a one-to-one ratio. The relationship between consumption and income is influenced by factors such as households' marginal propensity to consume (MPC), which represents the proportion of additional income that is spent on consumption.
