Consider the following society of 5 people with their respective income.Jim $80,000, David $75,000, Jo $20,000, Marcia $12,500, Robin $12,500(a) Construct a Lorenz curve for the following economy of five individuals.(b) What would society gain from greater equality in the income distribution? What would it lose?
Question
Consider the following society of 5 people with their respective income.Jim 75,000, Jo 12,500, Robin $12,500(a) Construct a Lorenz curve for the following economy of five individuals.(b) What would society gain from greater equality in the income distribution? What would it lose?
Solution
(a) To construct a Lorenz curve, we first need to order the individuals from the lowest to the highest income. Here is the ordered list:
- Marcia: $12,500
- Robin: $12,500
- Jo: $20,000
- David: $75,000
- Jim: $80,000
Next, we calculate the cumulative income and the cumulative percentage of people.
- Marcia: $12,500 (5% of total income, 20% of people)
- Robin: $25,000 (10% of total income, 40% of people)
- Jo: $45,000 (18% of total income, 60% of people)
- David: $120,000 (48% of total income, 80% of people)
- Jim: $200,000 (100% of total income, 100% of people)
The Lorenz curve is then plotted with the cumulative percentage of people on the x-axis and the cumulative percentage of income on the y-axis. The curve will start at the origin and end at the point (100, 100). The more the curve bows out from the line of equality (the 45-degree line), the more unequal the income distribution.
(b) Greater equality in income distribution could lead to a variety of societal benefits. These could include reduced poverty and social exclusion, improved social cohesion and reduced crime rates, and potentially better health outcomes. It could also lead to a more equitable distribution of opportunities and life chances, and could promote social mobility.
However, there could also be potential losses from greater income equality. These could include reduced incentives for individuals to work hard, innovate and take risks, which could potentially lead to lower economic growth. There could also be issues related to the redistribution mechanisms used to achieve greater equality, such as higher taxes, which could be seen as unfair or could have negative economic impacts.
Similar Questions
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If government programs to assist the poor are successful at equalizing the income distribution, then the Lorenz curve should shift ____________ and the Gini coefficient should ______________.Selected answer will be automatically saved. For keyboard navigation, press up/down arrow keys to select an answer.atoward the diagonal; decreasebaway from the diagonal; increasectoward the diagonal; increasedaway from the diagonal; decreaseeto a straight line; increase
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If the government increases tax rates to the richest households in the distribution, then the Lorenz curve should shift ____________ and the Gini coefficient should ______________.Selected answer will be automatically saved. For keyboard navigation, press up/down arrow keys to select an answer.atoward the diagonal; decreasebaway from the diagonal; increasectoward the diagonal; increasedaway from the diagonal; decreaseeto a straight line; increase
Deciding what the distribution of income should be is an example of positive economicsGroup of answer choicesTrueFalse
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