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Unformatted text preview: Chapter 20 The Distribution of Income SOLUTIONS TO TEXT PROBLEMS: Quick Quizzes 1. The poverty rate measures the percentage of the population whose family income falls below an absolute level called the poverty line. It tells you something about the distribution of income at the lower end of the income scale. Three potential problems in interpreting the measured poverty rate are: (1) in-kind transfers are not accounted for in the poverty rate, so the poverty rate overstates the amount of poverty; (2) the economic life cycle means that incomes are less equal in annual terms but more equal over peoples lifetimes; and (3) the poverty rate is affected by temporary changes in income, but inequality would be better measured by looking at permanent income. 2. A utilitarian would want to redistribute income based on the assumption of diminishing marginal utility, so would favor some redistribution from Pam to Pauline. A liberal would want to maximize the utility of the least well off person in society, so would also favor redistribution. A libertarian would not want to redistribute income as long as the process of earning income was a fair one, so the libertarian would not want to redistribute income from Pam to Pauline. 3. Policies aimed at helping the poor include minimum-wage laws, welfare, a negative income tax, and in-kind transfers. Minimum-wage laws can help the working poor without any cost to the government, but have the disadvantage of causing unemployment among some workers. Welfare assists the poor with direct aid, but creates incentives for people to become needy. The negative income tax is a good way to implement a program of financial aid for the poor and does not distort incentives like other programs do, but it may support those who are lazy and unwilling to work. In-kind transfers provide goods and services directly to the poor, ensuring that the poor get necessities such as food and shelter, but assume that the government knows what the poor need the most. 125 THE DISTRIBUTION OF INCOME 20 126 Chapter 20/The Distribution of Income Questions for Review 1. The richest fifth of the U.S. population earns about ten times as much income as the poorest fifth....
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- Winter '05