The following diagram shows the Lorenz curves for the factor (the market) income

Question

The following diagram shows the Lorenz curves for the factor (the market) income and the disposable income of the Netherlands in 2010. The disposable income is the factor income plus any taxes and government transfers. A' is the area between the perfect equality line and the disposable income Lorenz curve, while B' is the area under the disposable income Lorenz curve. Based on this information, which of the following statements are correct? Dsposable Gi 90 80 70 8 60 50 0 20 20 30 20 304 50 60 0 80 90300 Cumulative share of the population from lowest to highest income A. The Gini coefficient is the ratio AVB' B. The Gini coefficient for the factor income is higher than that for the disposable income. C. The taxes and the transters reduce income inequality in the Netherlands. D. After the taxes and the transfers, the poorest 50% of the population receive about 20% of the total income.

Explanation / Answer

Gini coffecient for disposable income is represented as A/A + B while area B also covers the lorenz curve for market income. This implies that the lorenz curve for market income is A + area of white region between lorenz curve of disposable income and lorenz curve of market income. Hence, the Gini coefficient of market income is more than that of disposable income

Second option is correct (B)

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