Detailed Answer
(b) The requirement is to calculate the marginal
propensity to save. Answer (b) is correct because the marginal
propensity to save is the change in savings divided by the change
in income [($700 – $500)/($3,500 – $3,000) = .4]. Answer (a)
is incorrect because the average propensity to save would be
calculated by dividing the new savings by the new income
($700/$3,500 = .2). Answer (c) is incorrect because the marginal
propensity to consume is the change in spending divided by
the change in income [($2,800 – $2,500)/($3,500 – $3,000) =
.6]. Answer (d) is incorrect because the average propensity to
consume would be calculated by dividing the new consumption
by the new income ($2,800/$3,500 = .8).