In the linear consumption function cons = ^B0 + ^B1 * inc
the (estimated) marginal propensity to consume (MPC) out of income is simply the slope,
^B1,
, while the average propensity to consume (APC) is ^cons/inc = ^B0 /inc + ^B1
. Using obser-
vations for 100 families on annual income and consumption (both measured in dollars), the
following equation is obtained:
^cons = -124.84 + .853 * inc
n=100, R^2 = .692
(i) Interpret the intercept in this equation, and comment on its sign and magnitude.
(ii) What is the predicted consumption when family income is $30,000?
(iii) With inc on the x-axis, draw a graph of the estimated MPC and APC.

i) the intercept is - 124.84 and it is negative because when the income of individuals is zero their consumption = - 124.84 (i.e. consumer  borrows 124.84 ).

ii) $25465.16

iii) attached below

Explanation:

Given that the equation is

^cons = -124.84 + .853 * inc

i) Interpret the intercept in this equation and comment on its sign and magnitude

intercept : the intercept is - 124.84 and it is negative because when the income of individuals is zero their consumption = - 124.84 (i.e. consumer  borrows 124.84 ).

The slope  = .853 is positive because consumption is will increase by 0.853 whether the income rises or decreases by the value of 1

ii) Determine the predicted consumption when family income = $30000

^cons = -124.84 + 0.853 * ( 30000 )

         = 25465.16

hence when family income = $30000 the predicted consumption = 25465.16

iii) Draw a graph of the estimated MPC and APC  ( inc on the x-axis )

MPC = 0.853 ( constant )

APC = Cons / inc

attached below is the required graph

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