Consumption propensity in the long run:

Question

Accepted Answer

The correct option is 1: In the long run, according to the standard Keynesian and post-Keynesian theories of consumption (specifically, the absolute income hypothesis modified for the long run, or Duesenberry's Relative Income Hypothesis), the Average Propensity to Consume (APC) tends to equal the Marginal Propensity to Consume (MPC). APC is defined as total consumption divided by total income (C/Y), while MPC is the change in consumption resulting from a change in income ($\Delta C / \Delta Y$). This long-run equality arises because it is generally assumed that in the long run, consumption starts from the origin (zero autonomous consumption), meaning that consumption is purely proportional to income. As income levels rise significantly over extended periods, the necessity for a fixed, positive level of consumption (autonomous consumption) decreases relative to disposable income, causing the APC line to approach and merge with the MPC line, resulting in a constant ratio of consumption to income. The incorrect option is 2: MPC \> APC. This relationship (MPC \> APC) is characteristic of the short run, according to Keynes's psychological law of consumption. In the short run, as income increases, people consume a smaller proportion of that extra income, meaning the increase in consumption ($\Delta C$) is smaller than the initial consumption proportion (C/Y), causing APC to fall as income rises. The incorrect option is 3: MPC \< APC. Similar to option 2, the condition MPC \< APC is generally observed in the short run when consumption expenditures include a positive level of autonomous consumption (C \> 0 when Y = 0). Since the increase in consumption from additional income (MPC) is less than the existing ratio of consumption to income (APC), the APC must be decreasing. The incorrect option is 4: MPC ≠ APC. While this is technically true in the short run (where APC \> MPC, as shown above), it contradicts the core finding of long-run empirical studies, which suggested that APC remains constant over long periods of economic growth. Therefore, in the context of long-run consumption propensity models, the relationship is established as equality, making the 'not equal' statement the incorrect long-run characteristic.