Question

3) For each country, why is the market Gini coefficient greater than the disposable income Gini coefficient?

3 B) Why must it always be the case that the marginal cost (MC) curve crosses the average cost (AC) curve at its minimum point?

Answer 1

(1) Gini coefficient of income are calculated on market income as well as disposable income. The gini coefficinet on market income sometimes referred to as a pre tax Gini coefficint is calculated on income before taxes and transfer and it measures inequality in income without considering the tax. The gini coefficinet on disposable income is referred as after tax Gini coefficinet and is calculated on income after taxes and transfers and it measures inequality in income after tax.

A goverment has tool to re distribute income - that's what taxes are for. This means when goverment apply taxes then there must be a fall in income inequality hence the after tax gini coefficinet must be smaller than the before tax gini coefficinet. This means that after the tax, the income inequality must fall.

Hence for every country the market gini coefficient must be greater than the disposable income gini coefficient.

(2) The marginal cost curve intersects the average cost curve exactly at the bottom of the average cost curve. we can understand thsi with the help of economic meaning of marginal and average cost.

If the marginal cost of production is below the average cot, then producing one more additional unit will reduce average cost overall and the ATC curve will be downward sloping in this zone.

On the other hand if the marginal cost of production for producing an additional unit is above the average cost for producing the earlier units, then producing a marginal unit will increase average costs overall and the ATC curve must be upward sloping in this zone.

The point of transition , between where Marginal cost is pulling ATC down and where it is pulling it up, must occur at the minimum point of the ATC curve.

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