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 income group earns the same income, and the total annual income in the economy is $500,000,000. Suppose that in 2016, the poverty line is set at an annual income of $40,700 for an individual Share of Total Income in Perkopia Percent Middle Lowest Second Fourth uintile 240 22.8 22.4 21.6 Highest Year 1998 2004 2010 2016 uintile uintile uintile 5.0 3.8 3.3 3.2 110 9.7 9.0 8.2 60 15.2 14.7 uintile 440 48.5 50.6 53.0 The data in the table suggest that there was income inequality from 1998 to 2016 Complete the following table to help you determine the poverty rate in Perkopia in 2016. 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: Recali that Perkopia has a population of 10,000 people.) Finally, determine whether the individual income for each quintile falls below the poverty line of $40,700 Share of Income in 2016 Percent 3.2 Individual Income Dollars Total Income Dollars Below Poverty Line? uintile Lowest Second Middle Fourth Highest 8.2 14.0 21.6 53.0 Using the information in this table, the poverty rate in Perkopia in 2016 is Suppose that the government introduces a welfare program in which any individual with an income of less than $40,700 per year receives a lump-sum transfer payment of $2,000 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 2016, 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 $40,700 receives a lump-sum transfer payment of $2,000 from the government. Larry, a resident of Perkopia who currently earns an income of $40,406, 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 Larry may accept the overtime if he feels that taking it will increase the chances of his receiving a significant promotion Larry would gain more income by turning down the overtime than he would if he accepted the overtime The $2,000 in aid presents a disincentive for Larry to make more than $40,700 per year.

Answer 1

The data suggest that there was an increase in income inequality over the years.

Quantile	share of income in 2016	Total Income 500000000*share	Individual Income Total income/2000	Below Poverty line? 40700
Lowest	3.2	16000000	8000	Yes
Second	8.2	41000000	20500	Yes
Middle	14.0	70000000	35000	Yes
Fourth	21.6	108000000	54000	No
Highest	53.0	265000000	132500	No

Poverty rate = 3/5*100 = 60%

When a welfare payment of 2000 is made, the first 3 groups will still remain below the poverty level

Poverty rate after the introduction of welfare = 3/5*100 =60%

All of the given statements are True