The following table summarizes the income distribution for the town of Perkopia,

Question

The following table summarizes the income distribution for the town of Perkopia, which has a population of 10, 000. The total annual income in the economy of Perkopia is $500, 000, 000. The data in the table suggest that there was______income inequality from 1993 to 2011. Suppose that in 1999 the poverty threshold is set at an annual income of $26,000 for an individual. If every individual within an income group earns the same income, then the poverty rate in Perkopia in 1999 is______. Again, suppose that in 1999 the poverty threshold is set at an annual income of $26,000 for an individual. Suppose that the government introduces a welfare program in which any individual with an income of less than $26,000 per year receives a lump-sum transfer payment of $2,500 from the government. Assume that In the short run there is no change in labor-supply behavior among the people in Perkopia and that every individual within an income group earns the same income. In the year 1999, the poverty rate in Perkopia is: 80% 20% 25% 40% 50% Again, suppose that in 1999 the poverty threshold is set at an annual income of $26,000 for an individual and that the government introduces a welfare program in which any individual with an income of less than $26,000 receives a lump-sum transfer payment of $2,500 from the government. Yvette, a new resident of Perkopia, currently earns an income of $25,500, has the opportunity to work overtime and earn an additional $1,000 this year. Which of the following statements are correct? Check all that apply. Yvette should turn down the extra money from the overtime even if she feels that taking it will increase the chances of her receiving a promotion. The $2,500 in aid presents a disincentive for Yvette to make more than $26,000 per year. Yvette would maintain a higher income by turning down the overtime than by accepting it.

Explanation / Answer

Poverty rate in 1999 is 40%

10,000 people divided by 5 equal groups is 2,000 per group.

The 2/5th income is: $500,000,000 x 8.8% / 2000 = $22,000 each

The 3/5th income is: $500,000,000 x 15.8% / 2000 = $39,500 each

So the 2/5th is below the poverty line and 3/5 th is above it, So poverty rate in 1999 is 2/5 = 40%.

Even after getting lump-sum transfer payment from the government of $2,500, the salary of 2/5th population will be $22,000+$2,500 = $24,500 which is below $26,000. Hence, poverty rate in 1999 remains unchanged at 2/5 = 40%.

Yvette will accept money from over-time if she feels she will get promoted next year which will make her earn more than $28,000 which she can get now from government transfer. So, she should not turn down is she expects such a promotion.

Yes, they disincentivise her but if promotion offers more next year then she may consider.

This year, she will make more money by turning down over-time.

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