Question

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 1998, the poverty line is set at an annual income of $30,000 for an individual. Year Share of Total Income in Perkopia (Percent) Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Highest Quintile 1998 5.0 11.0 16.0 24.0 44.0 2004 3.9 9.7 15.2 22.6 48.6 2010 3.5 8.8 14.7 22.0 51.0 2016 3.0 8.6 14.0 21.5 52.9 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 1998. 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 line of $30,000. Quintile Share of Income in 1998 Total Income Individual Income Below Poverty Line? (Percent) (Dollars) (Dollars) Lowest 5.0 Second 11.0 Middle 16.0 Fourth 24.0 Highest 44.0 Using the information in this table, the poverty rate in Perkopia in 1998 is . Suppose that the government introduces a welfare program in which any individual with an income of less than $30,000 per year receives a lump-sum transfer payment of $5,000 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 1998, 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 $30,000 receives a lump-sum transfer payment of $5,000 from the government. Kate, a resident of Perkopia who currently earns an income of $29,578, has the opportunity to work overtime and earn an additional $1,900 this year. Which of the following statements are correct? Check all that apply. Kate may accept the overtime if she feels that taking it will increase the chances of her receiving a significant promotion. The $5,000 in aid presents a disincentive for Kate to make more than $30,000 per year. Kate would gain more income by turning down the overtime than she would if she accepted the overtime

Answer 1

Part A

In the table,

Quintile	Share of income	Total Income	Individual income	Below poverty line
Lowest	5.00	25,000,000	12,500	Yes
Second	11.00	55,000,000	27,500	Yes
Middle	16.00	80,000,000	40,000	No
Fourth	24.00	120,000,000	60,000	No
Highest	44.00	220,000,000	110,000	No

The total income is calculated by multiplying the total income of the economy by the share of Income. The individual income is calculated by dividing total income by the population. assuming each quintile has 2000 people. The poverty line is set by $30,000.

The poverty rate in Perkopia is

Part B

Suppose the government introduces welfare program in which any individual with an income less than $30,000 per year receives a lump-sum transfer of $5,000, then every individual in first two quintiles in the table will have their income increased by that amount. The average income of first two quintiles will be, Lowest $17,500 and Second $32,500. Now the poverty rate in Perkopia falls by 5%.

Part C

Here all the statements are true. By taking the overtime, Kate will earn an additional $1,900, but he loses the income transfer of $5,000. So the net loss of income is $3,100. So all statements are true in the case of Kate.