1. Income inequality and the poverty rate The following table summarizes the inc
ID: 1126967 • Letter: 1
Question
1. Income inequality and the poverty rate The following table summarizes the income distribution for the town of Perkopia, which has a population of 10,000 people. Every individual within an ome group earns the same income, and the total annual income in the economy is $500,000,000. Suppose that in 2004, the poverty line is set at an annual income of $27,400 for an individual. Share of Total Income in Perkopia (Percent) Year Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Highest Quintile 1998 2004 2010 2016 5.0 3.9 3.5 3.2 11.0 9.9 8.8 7.6 25.0 22.9 22.0 21.5 43.0 48.1 51.1 53.7 16.0 15.2 14.0 The data in the table suggest that there was income inequality from 1998 to 2016Explanation / Answer
Between 1998 and 2016, share of individuals in the lowest quintile in total income of Perkopia has decreased from 5% to 3.2% while share of individuals in highest quintile in total income of Perkopia has increased from 43% to 53.7%.
Thus,
The data in the table suggest that there was an increase in income inequality from 1998 to 2010.
Following is the complete table -
The poverty rate in Perkopia in 2004 is 40%.
Now, any individual with an income of less than $27,400 per year receives a lump sum transfer payment of $6,000 from government.
This will increase the individual income in second quintile above $27,400.
So,
In the year 2004, the poverty rate after introduction of the welfare program in Perkopia is 20%.
Current income of Frances = $27,102
If Frances works overtime, she can earn $1,600.
Her total income with overtime is ($27,102 + $1,600) $28,702.
With overtime, her income is greater than $27,400 and she will not be eligible for government grant of $6,000.
So, she will lose $4,400 by working overtime.
Thus,
The $6,600 aid presents a disincentive for Frances to make more than $27,400 per year.
Secondly, Frances would gain more income by turning down the overtime than she would if she accepted the overtime.
The correct answer is the option (1) and (3).
Quintile Share of income in 2004 Total Income Individual Income Below Poverty Line Lowest 3.9 19,500,000 9,750 Yes Second 9.9 49,500,000 24,750 Yes Middle 15.2 76,000,000 38,000 No Fourth 22.9 114,500,000 57,250 No Highest 48.1 240,500,000 120,250 NoRelated Questions
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