What does the marginal propensity to consume (MPC) indicate?

The marginal propensity to consume (MPC) signifies the portion of additional income that a household decides to spend on consumption rather than saving. This concept is pivotal in understanding consumer behavior and how changes in income can lead to variations in spending patterns.

When households receive an increase in income, the MPC quantifies the extent to which they will allocate that extra income towards purchasing goods and services, framed as a percentage or proportion. For instance, if a household's income rises by $100 and they spend $70 of that amount, their MPC would be 0.70. This indicates that for every extra dollar earned, they are likely to spend 70 cents and save the remaining 30 cents.

The other options do not accurately capture the essence of the MPC. The first option suggests that households save all their income, which contradicts the concept of spending additional income. The third option refers to total income from investments, which is unrelated to the spending behavior tied to changes in income. Lastly, the average income level for households does not address the consumption response to changes in income. Thus, the correct understanding of the MPC is crucial for analyzing economic models and consumer spending behavior in relation to income changes.