F I L E The co n s u m p tio n fu n c tio n cap tu res o n e o f th e key relatio n sh ip s in eco nom ics th a t w as firs t d e v e lo p e d by John M a yn ard K eynes. It expresses c o n s u m p tio n as a fu n c tio n o f d isp osab le in co m

e, w h e re d isp o sab le in co m e is in co m e a fte r taxes. T h e ta b le b e lo w show s a p o rtio n o f ave ra g e U.S.

a n n u al c o n s u m p tio n an d disp o sab le in co m e fo r th e years 1 9 8 5 -2 0 0 6 . T h e c o m p le te d a ta set can be fo u n d on th e te x t w e b s ite , la b e le d C o n s u m p tio n F u n ctio n .

C onsu m ptio n D isposable Incom e 1985 $23,490 $22,887 1986 23,866 23,172

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2006 48,398 58,101 Source: The Statistical Abstract o f the United States.

W h en e s tim a tin g th e m o d el:

C o n s u m p tio n = β0 + β1 D isp o sab le In co m e + ε , th e fo llo w in g o u tp u t is p ro d u ced .

C o efficien ts S ta n d a rd Error t Sta t p -v a lue In te rc e p t 8550.675 593.925 14.397 5.12E -12 D isp o sab le In co m e 0.686 0.015 44.332 1.9E-21

a. Use Excel to rep lic a te th e a b o v e reg ression o u tp u t.

b. W h a t is th e sam p le regression eq u a tio n ?

c. In th is m o d e l th e slop e c o e ffic ie n t is c alled th e m arg in a l p ro p en sity to co n su m

e. In te rp re t its m e a n in g .

d. W h a t is p re d ic te d c o n s u m p tio n if d isp o sab le in co m e is

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