Question

here is an interesting relationship between crime, addiction,

and the distribution of income. For simplicity, assume there are two types of individuals: poor individuals (denoted p) and rich individuals (denoted r). Suppose incomes are normalized such that poor individuals have annual incomes y(p)= 50 while rich individuals have annual incomes y(r)= 100. Further, assume that each type of individual constitutes 50% of the population and there is no inflation.

(a) Suppose individuals can invest 40 units of their current income in a human capital investment which will raise their future incomes to x >100. If everyone invest inhuman capital, what will happen to the distribution of income? Explain why poor individuals may not pursue this investment even though, in terms of income outlay, they can afford the investment. If only the rich make the investment, what will happen to the distribution of income? What does this imply about individuals' incentives to invest in human capital and the distribution of income if individuals invest?

Answer 1

Investment in human capital leading to higher wages leads to increased productivity which in turn leads to higher employment outcomes and higher income potential. The key to reducing the income and wealth distribution gap between the rich and the poor is investment in human development. Therefore, if everyone invests in human capital, the wealth of the poor will certainly be more balanced in terms of distribution.
The poor who have lower income therefore spend most of their money, economically more likely than the rich are to consume and the poor end up without saving and investing, which contributes to a wider distribution of income between rich and poor ones. But the poor have lower incomes.
This means that the investment inducted depends primarily on income levels, the higher the level of income, the higher the tendency to save, the higher the investments enjoyable, the more the income divide between the rich and the poor is faulty.