Income Inequality and Poverty
ANSWERS TO ENDOFCHAPTER QUESTIONS
321
Using quintiles to briefly summarize the degree of income inequality in the United States.
How
and to what extent does government contribute to income equality?
The income share received by the highest 20 percent was 50.1 percent in 2004, which is more
than ten times the 3.4 percent received by the lowest 20 percent.
The middle three quintiles
receive under 50 percent of the total beforetax income.
The top two quintiles receive twice as
much as the bottom three quintiles combined; in fact, the top 20 percent receives more than the
bottom 80 percent.
The effect of government on the distribution of income occurs through both taxes and transfer
payments.
The total effect of federal, state, and local taxes on income distribution is mildly
progressive in that highincome households pay a somewhat higher proportion of their incomes in
taxes than lowincome families.
But about 80 percent of government’s contribution to income
equality takes place through transfer programs.
This contribution is particularly significant for
those in the lowest quintile, for whom government transfer payments comprise over 75 percent of
total income.
These statistics do not necessarily mean that the contribution of government in furthering equality
is entirely positive.
To the extent that transfer programs aimed at lowerincome households
decrease the incentive to work, the earned incomes of these households will be less than
otherwise.
Also, some transfer programs go to the nonpoor.
For example, most farm subsidies
go to the wealthiest farmers, and higher education funding tends to benefit middle to highincome
students.
322
(
Key Question
)
Assume Al, Beth, Carol, David, and Ed receive incomes of $500, $250, $125,
$75, and $50 respectively.
Construct and interpret a Lorenz curve for this fiveperson economy.
What percentage of total income is received by the richest and by the poorest quintiles?
See the figure below.
In this simple economy each person represents a complete income quintile
—20 percent of the total population.
The richest quintile (Al) receives 50 percent of total
income; the poorest quintile (Ed) receives 5 percent.
323
How does the Gini ratio relate to the Lorenz curve?
Why can’t the Gini ratio exceed 1?
What is
implied about the direction of income inequality if the Gini ratio declines from 0.42 to 0.35?
How would one show that change of inequality in the Lorenz diagram?
The Gini ratio is the numerical measurement of the inequality depicted by the Lorenz curve.
It is
calculated by dividing the area between the curve and the diagonal by the total area below the
diagonal.
221
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Income Inequality and Poverty
The Gini ratio can’t exceed 1 because if the Lorenz curve is as far as possible from the diagonal
(line of equality), the area between the curve and the diagonal will equal the total area below the
diagonal.
The equality will result in a Gini ratio of 1.
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '08
 Johnson
 Microeconomics, Distribution of wealth, Household income in the United States, Income distribution

Click to edit the document details