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# 101w06homework08-answers - Economics 101-300 Winter 2006...

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Economics 101-300 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 0-1 (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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c. 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 45-degree 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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101w06homework08-answers - Economics 101-300 Winter 2006...

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