Assume that the average income of an artist is $40,000 per year and that C=0.75Y^P. Further assume that in a good year the artist earns $50,000 and that in a bad year she earns $30,000.
1)Calculate the artist's average propensity to consume on average, in a good year and in a bad year respectively.
2)Calculate the artist's transitory income in an average year, in a good year and in a bad year respectively.
To calculate the artist's average propensity to consume (APC), we need to divide the artist's average consumption (C) by their average income (Y).
1) Calculate the artist's average propensity to consume on average:
The artist's average income is $40,000 per year. To find the average consumption, we need to substitute the average income into the consumption function. Given C=0.75Y^P, we have:
C = 0.75 * $40,000^P
C = 0.75 * ($40,000)
C = $30,000
The artist's average consumption is $30,000. Now divide this by the average income:
APC = C / Y
APC = $30,000 / $40,000
APC = 0.75 or 75%
So, in an average year, the artist's average propensity to consume is 0.75 or 75%.
2) Calculate the artist's transitory income in an average year:
Transitory income refers to the difference between actual income and average income in a given year. In this case, the average income is $40,000.
In an average year, the artist's actual income is also $40,000. Thus, the transitory income is calculated by subtracting the average income from the actual income:
Transitory income = Actual income - Average income
Transitory income = $40,000 - $40,000
Transitory income = $0
So in an average year, the artist's transitory income is $0.
Now let's calculate the artist's transitory income in a good year and in a bad year:
In a good year, the artist earns $50,000. Therefore, the transitory income is:
Transitory income = Actual income - Average income
Transitory income = $50,000 - $40,000
Transitory income = $10,000
In a good year, the artist's transitory income is $10,000.
In a bad year, the artist earns $30,000. Thus, the transitory income is:
Transitory income = Actual income - Average income
Transitory income = $30,000 - $40,000
Transitory income = -$10,000
In a bad year, the artist's transitory income is -$10,000, indicating a shortfall compared to the average income.
To summarize:
1) The artist's average propensity to consume on average is 75%.
2) The artist's transitory income in an average year is $0.
3) The artist's transitory income in a good year is $10,000.
4) The artist's transitory income in a bad year is -$10,000.