I would really appreciate if anyone of you could guide me as to whether I my solution is right or not.
Q. Consider the following consumption function:
C=a+b(Y-T)
Assuming a>0, show using calculus that APC falls as the disposable income increases.
Also show from the answer to above that APC>MPC
My take:
MPC = dC/dy = b (I have expanded the consumption function and taken derivative with respect to Y)
APC = C/Y = a+bY-bT/Y =a/Y -bt/Y + b
Now taking derivative of the APC derived above
i.e. dAPC/dY= -a/Y^2 + bt/Y^2
as it has negative sign it is < 0
Thanks.
