Question

6. 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 $27,400 for an individual.

Share of Total Income in Perkopia 

(Percent)

Year	Lowest Quintile	Second Quintile	Middle Quintile	Fourth Quintile	Highest Quintile
1994	5.0	11.0	16.0	24.0	44.0
2000	3.8	9.9	15.2	22.5	48.6
2006	3.5	9.2	14.8	22.0	50.5
2012	3.2	8.2	14.0	21.5	53.1

The data in the table suggest that there was an increase in income inequality from 1994 to 2012.

Complete the following table to help you determine the poverty rate in Perkopia in 2000. To do this, begin by determining the total income of all individuals in each quintile, using the fact that total annual income in the economy is $500,000,000. Next, determine the income of an individual in each quintile by dividing the total income of that quintile by the number of people in that quintile. (Hint: Recall that Perkopia has a population of 10,000 people.) Finally, determine whether the individual income for each quintile falls below the poverty income threshold, or poverty line, of $27,400. 

Using the information in the previous table, the poverty rate in Perkopia in 2000 is _______ .

Suppose that the government introduces a welfare program in which any individual with an income of less than $27,400 per year receives a lump-sum transfer payment of $10,000 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 _______  .

Again, suppose the government introduces a welfare program in which any individual with an income of less than $27,400 receives a lump-sum transfer payment of $10,000 from the government. Raphael, a resident of Perkopia who currently earns an income of $26,942, has the opportunity to work overtime and earn an additional $1,100 this year. 

Which of the following statements are correct? Check all that apply. 

• Raphael may accept the overtime if he feels that taking it will increase the chances of his receiving a significant promotion.

• The $10,000 in aid presents a disincentive for Raphael to make more than $27,400 per year. 

• Raphael would gain more income by turning down the overtime than he would if he accepted the overtime.

Answer 1

Blank - an increase

Quintile	Share	Total income	Individual income	Below Poverty level
Lowest	3.8	19000000	9500	Yes
Second	9.9	49500000	24750	Yes
Middle	15.2	76000000	38000	No
Fourth	22.5	112500000	56250	No
Highest	48.6	243000000	121500	No

Poverty rate = 2/5*100 = 40%

Poverty rate after the welfare program = 1/5*100 = 20%

All the given statements are correct