Economics 101300
Winter, 2006
Homework Problem Set # 8
Problems:
1)
Based on the graph above, which country has a larger Gini coefficient?
How can you
tell (be specific)?
Answer:
Answer: The Lorenz curve describing IdiAminia has a larger Gini coefficient. The Gini
coefficient is a numerical measure of how bowed out the Lorenz curve is and takes values
between 01 (it is the area between the Lorenz curve and the diagonal divided by the area
between the diagonal and the right vertex.
.
The more bowed out the curve, the higher the
Gini coefficient, and the higher the inequality in income distribution.
Therefore, because
the Lorenz curve describing the population of IdiAminia is more bowed out than
JoeHillLand, it must have a higher Gini coefficient.
2) Here is an example of how a topic addressed in the previous question might be
presented as a multiple choice problem:
Look at the graph above. What can we say
about the income distributions of JoeHillLand and IdiAminia?
a.
The richest 10% of the people in IdiAminia make less money than the richest 10%
in JoeHillLand.
b.
The poorest 10% of the people in JoeHillLand have a worse standard of living than
the poorest 10% in IdiAminia.
Cumulative %
of Income
Cumulative % of Households
100%
100%
0%
JoeHillLand
IdiAminia
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The income distribution in JoeHillLand is less unequal than the income
distribution in IdiAminia.
d.
The poorest 10% of the people in JoeHillLand have a better standard of living than
the poorest 10% in IdiAminia.
e.
The total income earned in JoeHillLand is more than the total income earned in
IdiAminia
Answer: C.
The Lorenz curve tells how income is distributed among the population.
It’s not informative in terms of the level of total income. Therefore, we can rule out b,
d and e.
The further away the Lorenz curve is from the 45degree line, the more unequal is the
income distribution the Lorenz curve represents. So the income distribution in
IdiAminia is more unequal. c) is the correct answer.
3)
Tax policy is one of the policy instruments that the government uses to promote
equity or welfare over efficiency. What are three considerations when thinking about
tax policy and the tradeoff between equity and efficiency?
Answer: The general principle is that there is a trade off between equity and
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 Winter '08
 Gerson
 Economics, Progressive Tax, Supply And Demand, Income inequality metrics

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