Scientists studying the economics of a country, community, or group of people are often interestedin the distribution of wealth, where wealth is understood to mean the income or the personal assetsof individual households. A powerful tool for illustrating how wealth is distributed across a societyis the Lorenz curve (invented by the American economist Max Otto Lorenz in 1905).A typical Lorenz curve is given by y = L(x), where 0 < x < 1 and 0 < y < 1. The variableI represents the fraction of all households in the society and y = L(x) represents the fraction ofthe total wealth that is owned by the fraction x of the society. For example, for the Lorenz curveshown in Figure 1, we see that L(0.5) = 0.2, which means that 0.5 (50%) of the society owns 0.2(20%) of the wealth.bottombotomy A1-Line of perfectequality0.8 of householdscontrol 0.6 ofthe wealth.Lorenz curve0.5 of householdscontrol 0.2 ofthe wealth.0.2B0.50.8 a1 1Fraction of HouseholdsFigure IFraction of Total Wealth 3. Interpret the point (0.9,0.7) in two ways, in terms of richest and poorest.

Loren curve is a diagrammatically way to measure income inequality. The points on the Lorenz curve…

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3. Interpret the point (0.9,0.7) in two ways, in terms of richest and poorest.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Scientists studying the economics of a country, community, or group of people are often interested
in the distribution of wealth, where wealth is understood to mean the income or the personal assets
of individual households. A powerful tool for illustrating how wealth is distributed across a society
is the Lorenz curve (invented by the American economist Max Otto Lorenz in 1905).
A typical Lorenz curve is given by y = L(x), where 0 < x < 1 and 0 < y < 1. The variable
I represents the fraction of all households in the society and y = L(x) represents the fraction of
the total wealth that is owned by the fraction x of the society. For example, for the Lorenz curve
shown in Figure 1, we see that L(0.5) = 0.2, which means that 0.5 (50%) of the society owns 0.2
(20%) of the wealth.
bottom
botom
y A
1-
Line of perfect
equality
0.8 of households
control 0.6 of
the wealth.
Lorenz curve
0.5 of households
control 0.2 of
the wealth.
0.2
B
0.5
0.8 a1 1
Fraction of Households
Figure I
Fraction of Total Wealth

3. Interpret the point (0.9,0.7) in two ways, in terms of richest and poorest.

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