Foundations of Economics (8th Edition)
8th Edition
ISBN: 9780134486819
Author: Robin Bade, Michael Parkin
Publisher: PEARSON
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Question
Chapter 20, Problem 5SPPA
To determine
Income after taxes and benefits and graphical representation of Lorenz curve of before and after tax benefits.
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Check out a sample textbook solutionStudents have asked these similar questions
A Lorenz curve is a graph whose axes measure the:
a. total amount of income in dollars on one axis and the total number of individuals or families receiving that income or a lower one on the other.
b. percentage of people (10 percent, 20 percent, etc.) on one axis and the percentage of total income received by the lowest 10 percent, the lowest 20 percent, etc., on the other. c. number of individuals or families receiving a certain income on one axis and the percentage of the total population represented by that number on the other.
d. number of individuals or families in different occupations on one axis and the median income received in that occupation on the other.
e. income classes (e.g., $0 to $1999 and $2000 to $3999) on one axis and the percentage of individuals or families in each such income class on the other.
The table shows after-tax income shares in Canada in 1986 and 2015.
After-tax income After-tax income
1986
2015
(percent of total)
Households
Lowest 20 percent
Second 20 percent
Middle 20 percent
Fourth 20 percent
Highest 20 percent
5
11
18
25
41
7
13
18
23
39
Draw a point to show the income earned by the lowest 20 percent of households in 1986.
Draw a point to show the income earned by the lowest 60 percent of households in 1986.
Draw a Lorenz curve that is consistent with the two points you've plotted.
Canadian after-tax income is distributed
equally in 2015 than in 1986.
100-
90-
80-
70-
60+
50-
40-
30+
20-
10-
04
Cumulative percentage of income
10 20 30 40 50 60 70 80 90 100
Cumulative percentage of households
>>> Draw only the objects specified in the question.
1. An economy's Lorenz Curve reveals that an economy's highest income quintile has 65% of the economy's income while the lowest income quintile only has 5% of the economy's income. Solely based on the Lorenz Curve, is this distribution of income fair? Why or why not?
2. To combat income inequality and to generate increased tax revenues to fund expenditures, government officials decide to aggressively increase how progressive income taxes are, so much so that the top income earners are marginally taxed 90% of their income (and while this marginal tax rate may seem oppressive, these top income earners still have more than enough income to satisfy all of their needs and all but the most extravagant of wants - basically, these earners have more than enough money). Argue why this tax policy is a fair approach to fund government expenditures. Why might this tax policy fail to achieve its objectives (tax revenues would actually decline as a result)?
Chapter 20 Solutions
Foundations of Economics (8th Edition)
Ch. 20 - Prob. 1SPPACh. 20 - Prob. 2SPPACh. 20 - Prob. 3SPPACh. 20 - Prob. 4SPPACh. 20 - Prob. 5SPPACh. 20 - Prob. 6SPPACh. 20 - Prob. 7SPPACh. 20 - Prob. 8SPPACh. 20 - Prob. 9SPPACh. 20 - Prob. 1IAPA
Ch. 20 - Prob. 2IAPACh. 20 - Prob. 3IAPACh. 20 - Prob. 4IAPACh. 20 - Prob. 5IAPACh. 20 - Prob. 6IAPACh. 20 - Prob. 7IAPACh. 20 - Prob. 8IAPACh. 20 - Prob. 9IAPACh. 20 - Prob. 10IAPACh. 20 - Prob. 11IAPACh. 20 - Prob. 1MCQCh. 20 - Prob. 2MCQCh. 20 - Prob. 3MCQCh. 20 - Prob. 4MCQCh. 20 - Prob. 5MCQCh. 20 - Prob. 6MCQCh. 20 - Prob. 7MCQ
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Similar questions
- What is measured on the two axes of a Lorenz curve?arrow_forwardTo reduce income inequality, should the marginal tax rates on the top 1 be increased?arrow_forwardExplain a situation using the supply and demand for skilled labor 111 which the increased number of college graduates leads to depressed wages. Given the rising cost of going to college, explain why a college education will or will not increase income inequality.arrow_forward
- What is the difference between poverty and income inequality?arrow_forwardExplain how you would create a government program that would give an incentive for labor to increase hours and keep labor from falling into the poverty trap.arrow_forwardUsing two demand and supply diagrams, one for the low-wage labor market and one for the high-wage labor market, explain how information technology can increase income inequality if it is a complement to high-income workers like salespeople and managers, but a substitute for low-come workers like file clerks and telephone receptionists.arrow_forward
- If a family of three earned 20,000, would they be able to make ends meet given the official poverty threshold?arrow_forwardBelow is a Lorenz Curve for a given country. Suppose its government establishes a 10% income tax on persons earning more than $500,000/year and uses the proceeds to subsidize secondary education. Show how the tax would affect income inequality by drawing the new Lorenz Curve.arrow_forwardAn economy's Lorenz Curve reveals that an economy's highest income quintile has 65% of the economy's income while the lowest income quintile only has 5% of the economy's income. Solely based on this Lorenz Curve, is the distribution of income fair? Why or why not?arrow_forward
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