Question

6. Income inequality and the poverty rate Dismiss All Please Wait . . . Please Wait... 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 $12,700 for an individual. Year Share of Total Income in Perkopia (Percent) Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Highest Quintile 1994 3.0 8.1 14.0 21.5 53.4 2000 3.4 9.0 14.8 22.0 50.8 2006 3.8 9.5 15.4 22.7 48.6 2012 4.0 10.0 16.5 24.0 45.5 The data in the table suggest that there was selector 1    no change in a decrease in no evidence of an increase in income inequality from 1994 to 2012. Points: Close Explanation Explanation: 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 $12,700. Quintile Share of Income in 2000 Total Income Individual Income Below Poverty Line? (Percent) (Dollars) (Dollars) Lowest 3.4 selector 1    Yes No Second 9.0 selector 2    Yes No Middle 14.8 selector 3    Yes No Fourth 22.0 selector 4    Yes No Highest 50.8 selector 5    Yes No Points: Using the information in the previous table, the poverty rate in Perkopia in 2000 is selector 1    10% 20% 40% 50% 60% . (Hint: The poverty rate is the share of the population below the poverty income threshold.) Points: Close Explanation Explanation: Suppose that the government introduces a welfare program in which any individual with an income of less than $12,700 per year receives a lump-sum transfer payment of $4,000 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 selector 1    10% 20% 40% 50% 60% . Points: Close Explanation Explanation: Again, suppose the government introduces a welfare program in which any individual with an income of less than $12,700 receives a lump-sum transfer payment of $4,000 from the government. Edison, a resident of Perkopia who currently earns an income of $12,199, has the opportunity to work overtime and earn an additional $1,500 this year. Which of the following statements are correct? Check all that apply. Edison may accept the overtime if he feels that taking it will increase the chances of his receiving a significant promotion. The $4,000 in aid presents a disincentive for Edison to make more than $12,700 per year. Edison would gain more income by turning down the overtime than he would if he accepted the overtime.

Answer 1

1. The data in the table suggest that there was selector 1

• a decrease in

income inequality from 1994 to 2012.

Reason- Share of rich has reduced from 53.4% to 45.5%. and Share of poor has increased from 3% to 4%. Therefore income inequality has reduced.

2.Using the information in the previous table, the poverty rate in Perkopia in 2000 is selector 1   

• 20%

Reason-

Quintile	Share of income	Total income	Individual income	Below poverty line?
Lowest	3.4	17000000	8500	yes
Second	9	45000000	22500	no
Middle	14.8	74000000	37000	no
Fourth	22	110000000	55000	no
Highest	50.8	254000000	127000	no

Formula-

Total income= Total income of economy* share of income

Individual income= Total income/ Number of people

Number of people in each quintile= 10000*20%=2000

Poverty rate = No. of people below poverty rate/ Total population

=2000/10000*100=20%

As only lowest quintile is below poverty.

3.In the year 2000, the poverty rate after the introduction of the welfare program in Perkopia is selector 1   

• 20%

Reason- lump-sum transfer payment of $4,000

Quintile	Share of income	Total income	Individual income	Individual income with program (+$4000)	Below poverty line?
Lowest	3.4	17000000	8500	12500	yes
Second	9	45000000	22500	26500	no
Middle	14.8	74000000	37000	41000	no
Fourth	22	110000000	55000	59000	no
Highest	50.8	254000000	127000	131000	no

Still lowest quintile is below poverty line ($12700)

Poverty rate= 2000/10000 *100=20%

4. All statements apply.

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

■ The $4,000 in aid presents a disincentive for Edison to make more than $12,700 per year.

■ Edison would gain more income by turning down the overtime than he would if he accepted the overtime.

Reason-

Edison's current income= $12199

Income with overtime= $12199+$1500= $13699

Income with lump sump transfer= $12199+$4000= $16199

Since income with lumpsum is more than income with overtime, aid is a disincentive for Edison to work overtime. But aid is only a one time lumpsum amount, if he feels that overime will lead to promotion and further rise in income. He would want to work overtime.