2. Data on before-tax income, taxes paid and consumption Page 188 spending (on domestic goods and services) for the Smith family in various years are given below.

BEFORE-TAX INCOME ($) TAX PAID ($) CONSUMPTION SPENDING ($) 25 000 3000 20 000 27 000 3500 21 350 28 000 3700 22 070 30 000 4000 23 600

a)Graph the Smith’s consumption function and find their household’s marginal propensity to consume. b)How much would you expect the Smiths to consume if their income was $32 000 and they paid taxes of $5000? c)John Smith wins a lottery prize. As a result, the Smith family increases its consumption by $1000 at each level of after-tax income. (‘Income’ does not include the prize money.) How does this change affect the graph of their consumption function? How does it affect their marginal propensity to consume? LO 7.3 MEDIUM