Question

Homework (Ch 20) 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 2001, the poverty line is set at an annual income of $47,000 for an individual, Year Lowest Quintile 4.0 2001 Share of Total Income in Perkopia (Percent) Second Quintile Middle Quintile Fourth Quintile 10.0 17.0 23.0 9.6 15.4 22.5 14.8 22.4 7.7 14.0 21.8 2007 3.7 Highest Quintile 46.0 48.8 50.0 53.5 2013 3.4 Ced 2019 3.0 The data in the table suggest that there was income inequality from 2001 to 2019 E 7- nited Complete the following table to help you determine the poverty rate in Perkopia in 2001. 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 untile (Hint: Recall that Perkope has a population of 10,000 people. Finally, determine whether the individual income for each quintile falls below the poverty line of $47.000,

Answer 1

The data in the above table suggest that there is rise in inequality from 2001 to 2019 because %of income earned from lowest quintile (lowest 20% of population in terms of income) have decreased from 4% to 3% while the % of income earned by highest quintile (top 20% of the population in terms of income) have increased from 60% to 53.5%.

Quintile	% of Income in 2001	Total Income = ($500,000,000 * % of Income in 2001)	Individual Income = (Total Income / 2,000)	Below Poverty Line
Lowest	4	20,000,000	10,000	Yes
Second	10	50,000,000	25,000	Yes
Middle	17	85,000,000	42,500	Yes
Fourth	23	115,000,000	57,500	No
Highest	46	230,000,000	115,000	No

Using the information in table, the poverty rate in Perkopia is 60% which is 3 "yes" out of 5.

If everyone receive $5,000 as transfer payments.

Quintile	% of Income in 2001	Total Income = ($500,000,000 * % of Income in 2001)	Individual Income = (Total Income / 2,000)	Individual Income + Transfer Payments	Below Poverty Line
Lowest	4	20,000,000	10,000	15,000	Yes
Second	10	50,000,000	25,000	30,000	Yes
Middle	17	85,000,000	42,500	47,500	No
Fourth	23	115,000,000	57,500	62,500	No
Highest	46	230,000,000	115,000	120,000	No

Poverty rate in Perkopia is reduced from 60% to 40%.

Alex is earning $46,898 now and can earn $1,700 from overtime. If he work, he will earn his current salary + overtime which is $46,898 + $1,700 = $48,598 while is he accept transfer payment from government he will have $46,898 + $5,000 = $51,898

Option A is correct as Alex would earn more money by turning down overtime.

Option B is correct as it is an disincentive for Alex to make more than $47,000.

Option C is also correct because of chance of promotion which might raise Alex's income more than $51,898.