Question

5. 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 2000, the poverty income threshold, or poverty line, is set at an annual income of $27,400 for an individual.

Year	Share of Total Income in Perkopia
	(Percent)
	Lowest Quintile	Second Quintile	Middle Quintile	Fourth Quintile	Highest Quintile
1994	5.0	11.0	16.0	25.0	43.0
2000	3.9	9.9	15.2	22.9	48.1
2006	3.5	8.8	14.6	22.0	51.1
2012	3.2	7.6	14.0	21.5	53.7

Question 1: The data in the table suggest that there was (no change in, an increase in, no evidence of, or a decrease in)  income inequality from 1994 to 2012.

Question 2: Complete the following table to help you determine the poverty rate in Perkopia in 2000. 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 income threshold, or poverty line, of $27,400.

Quintile	Share of Income in 2000	Total Income	Individual Income	Below Poverty Line?
	(Percent)	(Dollars)	(Dollars)
Lowest	3.9
Second	9.9
Middle	15.2
Fourth	22.9
Highest	48.1

Question3:Using the information in the previous table, the poverty rate in Perkopia in 2000 is(10%, 20%, 40%, 50%, or 60%)? .

Question 4:Suppose that the government introduces a welfare program in which any individual with an income of less than $27,400 per year receives a lump-sum transfer payment of $6,000 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 2000, the poverty rate after the introduction of the welfare program in Perkopia is  (10%, 20%, 40%, 50%, or 60)?

Question 5:Again, suppose the government introduces a welfare program in which any individual with an income of less than $27,400 receives a lump-sum transfer payment of $6,000 from the government. Sam, a resident of Perkopia who currently earns an income of $27,102, has the opportunity to work overtime and earn an additional $1,600 this year.

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

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

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

The $6,000 in aid presents a disincentive for Sam to make more than $27,400 per year.

Answer 1

1)  The data in the table suggest that there was (an increase in)  income inequality from 1994 to 2012.

as percent of income for lowest quintile decreased whereas percent of income of highest quintile increased.

2)

Total income = 500000000 x share of income

Individual income = total income / 2000

3) Since first two are below the poverty line so poverty rate = 2/5x100 = 40%

4) Suppose that the government introduces a welfare program in which any individual with an income of less than $27,400 per year receives a lump-sum transfer payment of $6,000 from the government

When this happens,second quitile income = 24750+6000 = 30750 which is above poverty line

whereas lowest quintile income = 9750+6000 = 15750 which is still below the poverty line

Poverty rate = 1/5x100 = 20%

5) All the statements are correct