Question

Income inequality and the poverty rate.

The following table summarizes the income distribution for the town of Perkopia, which has a population of 10,000 people. Every individual within an income group earns the same income, and the total annual income in the economy is $500,000,000. Suppose that in 2007, the poverty line is set at an annual income of $42,350 for an individual.

Year	Share of Total Income in Perkopia
	(Percent)
	Lowest Quintile	Second Quintile	Middle Quintile	Fourth Quintile	Highest Quintile
2001	3.0	8.6	14.0	21.9	52.5
2007	3.4	9.4	14.6	22.4	50.2
2013	3.8	9.7	15.2	22.9	48.4
2019	5.0	11.0	15.5	25.0	43.5

The data in the table suggest that there was income inequality from 2001 to 2019.

Complete the following table to help you determine the poverty rate in Perkopia in 2007. To do this, begin by determining the total income of all individuals in each quintile using the fact that total annual income in the economy is $500,000,000. Next, determine the income of an individual in each quintile by dividing the total income of that quintile by the number of people in that quintile. (Hint: Recall that Perkopia has a population of 10,000 people.) Finally, determine whether the individual income for each quintile falls below the poverty line of $42,350.

Quintile	Share of Income in 2007	Total Income	Individual Income	Below Poverty Line?
	(Percent)	(Dollars)	(Dollars)
Lowest	3.4
Second	9.4
Middle	14.6
Fourth	22.4
Highest	50.2

Using the information in this table, the poverty rate in Perkopia in 2007 is .

Suppose that the government introduces a welfare program in which any individual with an income of less than $42,350 per year receives a lump-sum transfer payment of $2,000 from the government. Assume that, in the short run, there is no change in labor-supply behavior among the people in Perkopia.

In the year 2007, the poverty rate after the introduction of the welfare program in Perkopia is .

Again, suppose the government introduces a welfare program in which any individual with an income of less than $42,350 receives a lump-sum transfer payment of $2,000 from the government. Shen, a resident of Perkopia who currently earns an income of $41,884, has the opportunity to work overtime and earn an additional $1,900 this year.

Which of the following statements are correct? Check all that apply.

Shen may accept the overtime if he feels that taking it will increase the chances of his receiving a significant promotion.

The $2,000 in aid presents a disincentive for Shen to make more than $42,350 per year.

Shen would gain more income by turning down the overtime than he would if he accepted the overtime.

Answer 1

Income inequality has decreased overtime

There was decrease in income inequality

Bcoz over the time , the share of income for higher Quintiles has increased

so table

Quintile	income share	total income	Individual income	Below poverty line
Lower	3.4	17,000,000	8500	yes
Second	9.4	47,000,000	23500	yes
Middle	14.6	73,000,000	36500	yes
Fourth	22.4	112,000,000	56,000	no
Highest	50.2	251,000,000	125,500	no

• poverty rate = 60/100 = 60%

• after introduction of policy , poverty rate remains same .= 60%

MCQ: options 2,3

1) The $2,000 in aid presents a disincentive for Shen to make more than $42,350 per year.

2) Shen would gain more income by turning down the overtime than he would if he accepted the overtime.