Chapter_18_-_Answer_to_Textbook_Problems

Chapter_18_-_Answer_to_Textbook_Problems - 18 Answers to...

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18 ECONOMIC INEQUALITY Answers to the Problems 1. a. Money income equals market income (wages, interest, and rent) plus cash payments from the government. b. To draw the Lorenz curve, plot the cumulative percentage of households on the x -axis and the cumulative percentage of income on the y -axis. Make the scale on the two axes the same. The Lorenz curve will pass through the following points: 20 percent on the x -axis and 4 percent on the y -axis; 40 percent on the x -axis and 14.8 percent on the y -axis; 60 percent on the x -axis and 32.1 percent on the y -axis; 80 percent on the x -axis and 56.3 percent on the y - axis; and 100 percent on the x -axis and 100 percent on the y -axis. c. U.S. money income was distributed more equally in 1967 than in 2005. The line of equality shows an equal distribution of income. The closer the Lorenz curve is to the line of equality, the more equal is the income distribution. The Lorenz curve for the U.S. economy in 1967 lies closer to the Line of equality than does the Lorenz curve in 2005. d. The biggest difference in the distribution of income in the United States in 1967 and 2005 is the share of income received by the highest 20 percent. This share increased from 43.7 percent to 50.4 percent. Smaller differences are the shares received by the four other groups, each of which decreased. The most likely explanation for these differences (and the one provided in the chapter) is that the information technologies and globalization of the 1990s are substitutes for low-skilled labor and complements of high-skilled labor. The demand for low-skilled labor has decreased relative to the supply of low-skilled labor and the wage rate of low-skilled labor has increased more slowly than the average. The demand for high- skilled labor has increased relative to the supply of high-skilled labor and the wage rate of high-skilled labor has increased faster than the average. 2. a. The wage rate of low-skilled workers is $6 an hour. The wage rate adjusts to make the quantity of labor demanded equal to the quantity supplied. b. Firms employ 2,000 hours of low-skilled workers a day. At a wage rate of $6 an hour, 2,000 hours are employed each day. c. The wage rate of high-skilled workers is $12 an hour. Because the marginal product of high-skilled workers at each employment level is $8 greater than the marginal product of low-skilled workers, firms are willing to pay high-skilled workers a higher wage rate than they are willing to pay low-skilled workers. For example, the demand curve for low-skilled workers tells us that firms are willing to hire 4,000 hours of low-skilled workers at a wage rate of $4 an hour. So firms are willing to hire 4,000 hours of high-skilled workers at $12 an hour. That is, the demand curve for high-skilled labor lies above the demand curve for low-skilled workers such that at each quantity of workers the wage rate for high-skilled workers is $8 greater than that for low-skilled workers. (You can
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Chapter_18_-_Answer_to_Textbook_Problems - 18 Answers to...

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