Deck 21: Income Inequality, Poverty, and Discrimination

Question 1

Use quintiles to briefly summarize the degree of income inequality in the United States. How and to what extent does government reduce income inequality

Answer 1

The study of the distribution of income among the people is facilitated by the introduction of quintiles. The entire population is divided in several groups with a fixed percentage of people in that group. The income received by each quintile is then compared with others to find the instance of income inequality.
Data indicates that the percentage of income received by top 20 percent of the population was 49.8 in 2003. This figure is by and large sufficient to display the income inequality. This fact is bolstered by another data of income share received by poorest 20 percent which is mere 3.4 percent.
It also suggests that the remaining 60 percent of the population is receiving less than 50 percent of income earned by all the people. A profound analysis reveals that the richest 40 percent of the population earn the same income as it is earned by the poorest 60 percent. Using these quintiles, another data suggests that the richest 20 percent earns as much as the poorest 80 percent.
Government is aimed at improving the living conditions of the citizens. This aim also includes the reduction in the instances of income inequality. The tools are taxes and transfer payments through which income is redistributed. The nature of all the taxes at federal, state as well as local level is progressive.
This implies that lower income groups pay a lower absolute tax amount and the higher income group has a large tax liability. This is a method of transferring wealth from rich to the poor. As much as 80 percent of the contribution of the government in reducing income inequality is done through transfer programs.
Various cash and noncash transfer schemes are used to transfer this wealth. It should be, however, remember that government's effort in reducing the income inequality is not as successful as it appears in the draft. These transfers also generate an incentive to reduce work effort, thereby encouraging lower income households to work less and earn a lower income to receive benefits.
In addition, transfer of income is done through welfare programs and some of these program extend these benefits to those who are neither poor nor needy. This is true as far as the farm subsidies are concerned where the subsidies are provided even to the richest farmers. In case of student loans, the benefits are mostly extended to high income and middle income students than lower income students.

Question 2

In 2012 Forbes magazine listed Bill Gates, the founder of Microsoft, as the richest person in the United States. His personal wealth was estimated to be $66 billion. Given that there were about 309 million people living in the United States that year, how much could each person have received if Gates' wealth had been divided equally among the population of the United States (Hint: A billion is a 1 followed by 9 zeros while a million is a 1 followed by six zeros.)

Answer 2

Income distribution:
Mr. G accumulated wealth worth of $66,000,000,000 will be distributed equally among the United States people. Hence, the each person's share would be as follows:
Thus, each person will receive
if Mr.G's wealth had been divided equally among the population of the United States.

Question 3

Suppose that the United States has a Gini ratio of 0.41 while Sweden has a Gini ratio of 0.31. Which country has a more equal distribution of income

A) The United States.
B) Sweden.
C) They are actually equal.

Answer 3

Gini coefficient:
The Gini coefficient lays between 0 to 100. The Gini coefficient close to 100 indicates higher income inequality and close to 0 indicates lower income inequality.
Gini ratio of United State is 0.41 and of Sweden ratio is 0.31. Since the Gini coefficient for Sweden is lower than the United State, Sweden has more equal distribution.
Thus, option 'b' is correct.

Question 4

Assume that Al, Beth, Carol, David, and Ed receive incomes of $500, $250, $125, $75, and $50, respectively. Construct and interpret a Lorenz curve for this five-person economy. What percentage of total income is received by the richest quintile and by the poorest quintile

Question 5

Imagine an economy with only two people. Larry earns $20,000 per year, while Roger earns $80,000 per year. As shown in the following figure, the Lorenz curve for this two-person economy consists of two line segments. The first runs from the origin to point a , while the second runs from point a to point b.

a. Calculate the Gini ratio for this two-person economy using the geometric formulas for the area of a triangle (= ½ × base × height) and the area of a rectangle (= base × height). (Hint: The area under the line segment from point a to point b can be thought of as the sum of the area of a particular triangle and the area of a particular rectangle.)
b. What would the Gini ratio be if the government taxed $20,000 away from Roger and gave it to Larry (Hint: The figure will change.)
c. Start again with Larry earning $20,000 per year and Roger earning $80,000 per year. What would the Gini ratio be if both their incomes doubled How much has the Gini ratio changed from before the doubling in incomes to after the doubling in incomes

Question 6

Some part of income inequality is likely to be the result of discrimination. But other factors responsible for inequality include (select as many as apply):

A) Differences in abilities and talents.
B) Differences in education and training.
C) Different preferences for work versus leisure.
D) Different preferences for low-paying but safe jobs relative to high-paying but dangerous jobs.

Question 7

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

Question 8

In 2012, many unskilled workers in the United States earned the federal minimum wage of $7.25 per hour. By contrast, average earnings in 2012 were about $22 per hour, and certain highly skilled professionals, such as doctors and lawyers, earned $100 or more per hour.
a. If we assume that wage differences are caused solely by differences in productivity, how many times more productive was the average worker than a worker being paid the federal minimum wage How many times more productive was a $100-per-hour lawyer compared to a worker earning minimum wage
b. Assume that there are 20 minimum-wage workers in the economy for each $100-per-hour lawyer. Also assume that both lawyers and minimum-wage workers work the same number of hours per week. If everyone works 40 hours per week, how much does a $100-per-hour lawyer earn a week How much does a minimum-wage worker earn a week
c. Suppose that the government pairs each $100-per-hour lawyer with 20 nearby minimum-wage workers. If the government taxes 25 percent of each lawyer's income each week and distributes it equally among the 20 minimum-wage workers with whom each lawyer is paired, how much will each of those minimum-wage workers receive each week If we divide by the number of hours worked each week, how much does each minimum-wage worker's weekly transfer amount to on an hourly basis
d. What if instead the government taxed each lawyer 100 percent before dividing the money equally among the 20 minimum-wage workers with whom each lawyer is paired-how much per week will each minimum-wage worker receive And how much is that on an hourly basis

Question 9

Suppose that a society contains only two members, a lawyer named Monique and a handyman named James. Five years ago, Monique made $100,000 while James made $50,000. This year, Monique will make $300,000 while James will make $100,000. Which of the following statements about this society's income distribution are true
Select one or more answers from the choices shown.

A) In absolute dollar amounts, the entire distribution of income has been moving upward.
B) In absolute dollar amounts, the entire distribution of income has been stagnant.
C) The relative distribution of income has become more equal.
D) The relative distribution of income has become less equal.
E) The relative distribution of income has remained constant.
F) The rich are getting richer while the poor are getting poorer.
G) The rich are getting richer faster than the poor are getting richer.

Question 10

Why is the lifetime distribution of income more equal than the distribution in any specific year

Question 11

The desire to maximize profits can work against racial and other types of discrimination. To see this, consider two equally productive accountants named Ted and Jared. Ted is black, and Jared is white. Both can complete 10 audits per month.
a. Suppose that for any accounting firm that hires either Ted or Jared, all the other costs of performing an audit (besides paying either Ted or Jared) come to $1,000 per audit. If the going rate that must be paid to hire an accountant is $7,000 per month, how much will it cost an accounting firm to produce one audit if it hires either Ted or Jared to do the work
b. If the market price that accounting firms charge their clients for an audit is $1,800, what would the accounting profit per audit be for a firm that hired either Ted or Jared What is the profit rate as a percentage
c. Suppose that firm A dislikes hiring black accountants, while firm B is happy to hire them. So Ted ends up working at firm B rather than firm A. If Ted works 11 months per year, how many audits will he complete for firm B each year How much in accounting profits will firm B earn each year from those audits
d. Because firm A passed on hiring Ted because he was black, firm A is forgoing the profits it could have earned if it had hired Ted. If the firm is willing to forgo up to $5,000 per year in profit to avoid hiring blacks, by how many dollars will firm A regret its decision not to hire Ted

Question 12

Suppose that the last dollar that Victoria receives as income brings her a marginal utility of 10 utils while the last dollar that Fredrick receives as income brings him a marginal utility of 15 utils. If our goal is to maximize the combined total utility of Victoria and Fredrick, we should:

A) Redistribute income from Victoria to Fredrick.
B) Redistribute income from Fredrick to Victoria.
C) Not engage in any redistribution because the current situation already maximizes total utility.
D) None of the above.

Question 13

Briefly discuss the major causes of income inequality. With respect to income inequality, is there any difference between inheriting property and inheriting a high IQ Explain.

Question 14

If women are crowded into elementary education and away from fire fighting, wages in fire fighting will tend to be ______ than if women weren't crowded into elementary education.

A) Higher.
B) Lower.

Question 15

What factors have contributed to increased income inequality since 1975

Question 16

In the taste-for-discrimination model, an increase in employer prejudice against African-American workers would cause the discrimination coefficient to ____ and the demand curve for African-American labor to shift ___________.

A) Decrease; right.
B) Decrease; left.
C) Increase; right.
D) Increase; left.

Question 17

Should a nation's income be distributed to its members according to their contributions to the production of that total income or according to the members' needs Should society attempt to equalize income or economic opportunities Are the issues of equity and equality in the distribution of income synonymous To what degree, if any, is income inequality equitable

Question 18

Do you agree or disagree Explain your reasoning. "There need be no trade-off between equality and efficiency. An 'efficient' economy that yields an income distribution that many regard as unfair may cause those with meager incomes to become discouraged and stop trying. So efficiency may be undermined. A fairer distribution of rewards may generate a higher average productive effort on the part of the population, thereby enhancing efficiency. If people think they are playing a fair economic game and this belief causes them to try harder, an economy with an equitable income distribution may be efficient as well."

Question 19

Comment on or explain:
a. Endowing everyone with equal income will make for very unequal enjoyment and satisfaction.
b. Equality is a "superior good"; the richer we become, the more of it we can afford.
c. The mob goes in search of bread, and the means it employs is generally to wreck the bakeries.
d. Some freedoms may be more important in the long run than freedom from want on the part of every individual.
e. Capitalism and democracy are really a most improbable mixture. Maybe that is why they need each other-to put some rationality into equality and some humanity into efficiency.
f. The incentives created by the attempt to bring about a more equal distribution of income are in conflict with the incentives needed to generate increased income.

Question 20

How do government statisticians determine the poverty rate How could the poverty rate fall while the number of people in poverty rises Which group in each of the following pairs has the higher poverty rate: ( a ) children or people age 65 or over ( b ) African Americans or foreign-born noncitizens ( c ) Asians or Hispanics

Question 21

What are the essential differences between social insurance and public assistance programs Why is Medicare a social insurance program, whereas Medicaid is a public assistance program Why is the earned-income tax credit considered to be a public assistance program

Question 22

The labor demand and supply data in the following table relate to a single occupation. Use them to answer the questions that follow. Base your answers on the taste-for-discrimination model.

a. Plot the labor demand and supply curves for Hispanic workers in this occupation.
b. What are the equilibrium Hispanic wage rate and quantity of Hispanic employment
c. Suppose the white wage rate in this occupation is $16. What is the Hispanic-to-white wage ratio
d. Suppose a particular employer has a discrimination coefficient d of $5 per hour. Will that employer hire Hispanic or white workers at the Hispanic-white wage ratio indicated in part c Explain.
e. Suppose employers as a group become less prejudiced against Hispanics and demand 14 more units of Hispanic labor at each Hispanic wage rate in the table. What are the new equilibrium Hispanic wage rate and level of Hispanic employment Does the Hispanic-white wage ratio rise or fall Explain.
f. Suppose Hispanics as a group increase their labor services in that occupation, collectively offering 14 more units of labor at each Hispanic wage rate. Disregarding the changes indicated in part e , what are the new equilibrium Hispanic wage rate and level of Hispanic employment Does the Hispanic-white wage ratio rise, or does it fall

Question 23

Males under the age of 25 must pay far higher auto insurance premiums than females in this age group. How does this fact relate to statistical discrimination Statistical discrimination implies that discrimination can persist indefinitely, while the taste-for-discrimination model suggests that competition might reduce discrimination in the long run. Explain the difference.

Question 24

Use a demand-and-supply model to explain the impact of occupational segregation or "crowding" on the relative wage rates and earnings of men and women. Who gains and who loses from the elimination of occupational segregation Is there a net gain or a net loss to society Explain.

Question 25

LAST WORD Go to Table 1 in the Last Word and compute the ratio of average wealth to median wealth for each of the 6 years. What trend do you find What is your explanation for the trend The federal estate tax redistributes wealth in two ways: by encouraging charitable giving, which reduces the taxable estate, and by heavily taxing extraordinarily large estates and using the proceeds to fund government programs. Do you favor repealing the estate tax Explain.