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 2012, the poverty income threshold, or poverty line, is set at an annual income of $28,000 for an individual. Year Share of Total Income in Perkopia (Percent) Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Highest Quintile 1994 3.2 8.3 14.0 21.5 53.0 2000 3.3 9.2 14.9 22.0 50.6 2006 3.7 9.6 15.0 22.8 48.9 2012 4.0 10.0 16.0 23.0 47.0 The data in the table suggest that there was _______(an increase/no evidence/no change in/decrease in)____ income inequality from 1994 to 2012. Complete the following table to help you determine the poverty rate in Perkopia in 2012. 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 $28,000. Quintile Share of Income in 2012 Total Income Individual Income Below Poverty Line? (Percent) (Dollars) (Dollars) Lowest 4.0 ____ ____ yes or no Second 10.0 ____ ____ yes or no Middle 16.0 ____ ____ yes or no Fourth 23.0 ____ ____ yes or no Highest 47.0 ____ ____ yes or no Using the information in the previous table, the poverty rate in Perkopia in 2012 is (10, 20, 30, 40, 50, 60 %) . Suppose that the government introduces a welfare program in which any individual with an income of less than $28,000 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 2012, the poverty rate after the introduction of the welfare program in Perkopia is (10, 20,40, 50, 60 %) Which of the following statements are correct? Check all that apply. -Frances may accept the overtime if she feels that taking it will increase the chances of her receiving a significant promotion. -Frances would gain more income by turning down the overtime than she would if she accepted the overtime. -The $4,000 in aid presents a disincentive for Frances to make more than $28,000 per year.

Answer 1

The share in total income of top quintile decreased from 53% to 47% and the gap between the lowest and highest quintile reduced from (53%-3.2%) = 49.8% to 43%, hence prima facie it suggests that the income inequality would have reduced.

Note the following:

• Total income has been arrived at by multiplying the total city income of 500 million by the respective quintile share
• Individual income is simply quintile income divided by 2000 (since total population is 10000 hence each quintile will be 1/5 in size)
• The poverty rate is 40% since 40% of the population has income below $28000

After the introduction of the welfare program, the second quintile people will rise above the poverty line, hence the poverty percentage will decrease to 20% only.

Option 3 is applicable for Frances. Option 2 may be true if Frances is in quintile 2 but information is not given for the same .