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ID: 1213132 • Letter: #

Question

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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 income group earns the same income, and the total annual income in the economy is $500,000,000. Suppose that in 2000, the poverty income threshold, or poverty line, is set at an annual income of $42,050 for an individual.

***Using the information in the previous table, the poverty rate in Perkopia in 2000 is 10% / 20% / 40% / 50% / 60%.

Suppose that the government introduces a welfare program in which any individual with an income of less than $42,050 per year receives a lump-sum transfer payment of $8,000 from the government. Assume that, in the short run, there is no change in labor-supply behavior among the people in Perkopia.

***In the year 2000, the poverty rate after the introduction of the welfare program in Perkopia is 10% / 20% / 40% / 50% / 60%.

Again, suppose the government introduces a welfare program in which any individual with an income of less than $42,050 receives a lump-sum transfer payment of $8,000 from the government. Ana, a resident of Perkopia who currently earns an income of $41,947, has the opportunity to work overtime and earn an additional $1,700 this year.

Year 1994 2000 2006 2012 Share of Total Income in Perkopia (Percent) Middle Quintile 14.0 14.6 15.0 16.0 Lowest QuintileSecond Quintile 3.0 3.5 3.6 5.0 8.8 9.5 11.0 Fourth Quintile 21.6 22.0 22.9 24.0 Highest Quintile 53.2 51.1 49.0 44.0 The data in the table suggest that there was a decrease in ? income inequality from 1994 to 2012

Explanation / Answer

Answer:

The data in the table suggest that there was a decrease in income inequality from 1994 to 2012

this is evident because share of lower quintile are increasing and highst quintile is decreasing which means decreasing inequlaity

quintile

share of income in 2000(%)

total income($)

individual income($)

below poverty income?

lowest

3.5

17500000

8750

yes

second

8.8

44000000

22000

yes

middle

14.6

73000000

36500

yes

fourth

110000000

55000

highest

51.1

255500000

127750

total

500000000

Using the information in the previous table, the poverty rate in Perkopia in 2000 is 60% ( first three quintile is below poverty line so 60% population is below poverty line.)

due to intrduction of lum sum tranfer payment , middle quintile population will receive a lump-sum transfer payment of $8,000 from the government and they will be above poverty line so poverty rate in Perkopia in 2000 will drop to 40%

if Ana work overtime than her total income will be 41947+1700 =43647

but if she doesn't go for overtime, she will recieve lumpsum payment from Govt , her total income will be

41947+8000=49947

so it is more profitable for her to turn down overtime opportunity as gain from lumsum tranfer from Govt is more than working overtime

so statement (1) and 3 are correct, we can't say anything about 2 because there is no information about promotion rules