Calculating the Marginal Propensity to Consume from Unearned Income
An individual's optimal consumption choice is represented by the function c*(w, I) = 0.6(24w + I), where 'w' is the hourly wage and 'I' is the amount of unearned income. First, calculate the partial derivative of the optimal consumption function with respect to unearned income (∂c*/∂I). Second, use this result to determine the exact change in dollars to the individual's consumption if their unearned income increases by $50, assuming their wage remains constant.
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