STUDY GUIDE F/MICROECONOMICS
21st Edition
ISBN: 9781307066920
Author: McConnell
Publisher: MCG/CREATE
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Question
Chapter 23, Problem 2DQ
To determine
The Lorenz curve and proportion of total income that is received by the rich and poor quintile.
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Wealth, earnings, and disposable income are just three of several ways of looking at inequality. Imagine a household that earns $80,000 per year from labor. In that year, it also receives an income of $3,000 from investments, pays $12,000 in tax, and receives $7,000 in transfers from the state. Which of the following is its market income and its disposable income? O $83,000; $71,000. O $83,000 $78,000. O $80,000; $68,000. O $80,000; $75,000. J
A5.
Suppose that the initial rural distribution of income is (1, 2, 3, 4) while the initial urban distribution is (3, 4). The poverty line is 2, so the overall poverty rate (headcount index) is 1/3. Now imagine that all of the rural poor move to urban areas and each of them gains 20% in real income. Verify that the overall poverty rate falls to 1/6, yet the urban poverty rate rises from zero to 1/4.
. Consider two communities. In one community,ten families have incomes of $100,000 each and tenfamilies have incomes of $20,000 each. In the othercommunity, ten families have incomes of $250,000each and ten families have incomes of $25,000 each.a. In which community is the distribution of incomemore unequal? In which community is theproblem of poverty likely to be worse?b. Which distribution of income would Rawls prefer?Explain.c. Which distribution of income do you prefer?Explain.d. Why might someone have the oppositepreference?
Chapter 23 Solutions
STUDY GUIDE F/MICROECONOMICS
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- -Suppose Country A and Country B have the followingpopulation and income distributions: Draw a Lorenz Curve for each country. Additionally, comment on which country ismore unequal.arrow_forward[1] Consider an income distribution S: (10, 20, 30, 50, 100). Suppose it is divided into two groups, group A: (10, 30, 50) and group B: (20, 100). Let the poverty line be 30. (a) Show that for both Headcount and Poverty Gap, the weighted sum of poverty for group A and group B is the same as the overall poverty in S. (b) Now consider a relative poverty line which is 60 percent of the median income for each group. Will the decomposition rule still hold? Explain.arrow_forwardGive some examples of how Lorenz curves and Gini coefficients can be used as summary measures of equality and inequality in a nation's distribution of income.arrow_forward
- Assume that workers whoses are less than $8000 currently pay no federal income taxes. Suppose a new government program guarantees each worker $4000, whether or not he or she earns any income. For all earned income up to $8000, the worker must pay a 50- percent tax. Draw the budget line facing the worker under this new program. Using the line drawing tool, draw the new budget line facing a worker whose wage is such that his or her pre-tax earned income is less than $8000. Label this line 'BC2'.arrow_forwardAssume that Al, Beth, Carol, David, and Ed receive incomes of $500, $250, $125, $75, and $50, respectively. Construct and interpret a Lorenz curve for this five-person economy. What percentages of total income are received by the richest quintile and by the poorest quintile?arrow_forwardIf there are two communities, one with ten families have incomes of $100,000 each and ten families have incomes of $20,000 each. In the other community, ten families have incomes of $250,000 each and ten families have incomes of $25,000 each. Which community is the distribution of income more unequal? In which community is the problem of poverty likely to be worse?Which distribution of income would Rawls prefer? Explain.Which distribution of income do you prefer? Explain.Why might someone have the opposite preference?arrow_forward
- World Bank data show that in 1995, the poorest 20% of households accounted for 7.5% of household income in Niger, the next 20% of households accounted for 11.8% of income, the middle 20% accounted for 15.5% of income, the second richest 20% accounted for 21.1% of income, and the top 20% accounted for 44.1% of income. What was the cumulative income share of the bottom 60% of households in Niger? 2. Draw a Lorenz curve and calculate the Gini coefficient for Niger.arrow_forwardWhich set of policies is more likely to cause a tradeoff between economic output and equality: policies of redistribution policies aimed at the ladder of opportunity? Explain how the production possibility frontier tradeoff between economic equality and output might look in each case.arrow_forwardExplain how a country may experience greater equality in the distribution of income, yet still experience high rates of poverty. Hint: Look at the Clear It Up 'How do governments measure poverty in low-income countries?' and compare to Table 15.5.arrow_forward
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