Question

1. Suppose I am considering the effect of an economic policy on household income. Do I look at the mean income or the median income? Explain why.

Answer 1

Median income is the amount that divides the income distribution into two equal groups, half having income above that amount, and half having income below that amount. Mean income (average) is the amount obtained by dividing the total aggregate income of a group by the number of units in that group.

To study the effect of economic policies on the household income one should consider the median income but not the mean because mean would become higher due the the people who are rich and earns more money. Mean is basically very prone to the outliers while median is not.

Suppose there are 5 person who earns the money as $50, $70, $ 60, $ 100, $ 10000

Now due the $10000 mean would be very high which is not correct representative of the population. Hence one should use median income