Econ 9: Chap 13

2 The highest-income quintile of the population receives 13 times as much income as the lowest-income quintile. However, the highest-income quintile only spends 4 times as much as the lowest-income quintile. Identify the possible reason or reasons for this stark difference between income inequality and consumption inequality. 1. The richest quintile has the ability to save a larger percentage of its income. 2. Individuals experiencing temporary fluctuations in their incomes are more likely to maintain moderate spending habits. 3. The poverty line does not reflect relative poverty. 4. Intergenerational mobility allows children to consume more than their parents.

1. The richest quintile has the ability to save a larger percentage of its income. 2. Individuals experiencing temporary fluctuations in their incomes are more likely to maintain moderate spending habits.

Assume there are two individuals in the economy, Ahmed and Bob. The graph depicts the well‑being curve, which plots the average level of satisfaction, for both at each level of income. Point A represents Ahmed's annual income and level of satisfaction and point B represents Bob's. SatisfactionAnnual Income040,00080,000120,000160,000200,000012345678910BA a. What is the total level of satisfaction in this economy?

11.5

17c. After the redistribution in part b, what is the total level of satisfaction in this economy?

13

7 Extreme efficiency comes at a cost of terrible inequality, while perfect equality comes at a cost of terrible inefficiency. However, there are cases where there is no efficiency cost to increased equality. Identify each scenario that is likely to increase equality with little or no efficiency cost. 1. Using money and influence, rich donors successfully lobby for tax cuts for the highest 1% of earners. 2. Atlanta's investment in public transportation leads to higher worker productivity, as fewer employees miss days or show up late for work. 3. An extension of unemployment benefits leads to prospective workers taking more time off between jobs. 4. After-school programs in Chicago reduce crime rates among teenagers. 5. Programs offering free or low-cost childcare in Los Angeles lead to increased labor force participation among women, particularly lower-income women.

2. Atlanta's investment in public transportation leads to higher worker productivity, as fewer employees miss days or show up late for work. 4After-school programs in Chicago reduce crime rates among teenagers.5. Programs offering free or low-cost childcare in Los Angeles lead to increased labor force participation among women, particularly lower-income women.

4a. BLANK poverty judges the adequacy of resources to an unchanging standard. BLANK poverty compares contemporary society to the material standard of living.

Absolute, Relative

Discussions of inequality often focus on annual income inequality. a. From the list below, select the measure(s) that are measures of inequality. 1. Spending 2.Wealth 3.Permanent income 4. Intergenerational mobility

All of them

Your friend Burrell says that the government should hire fewer social workers in order to reduce the cost of federal assistance programs. He says reducing administrative costs will allow people to pay much lower taxes. Consider whether or not his argument is valid. Most of the leakage in federal assistance programs comes from A. the administrative costs of running the programs. B. peoples' responses to financial incentives. C. the diminishing marginal utility of income. D. the regressive nature of income taxes in the United States.

B. peoples' responses to financial incentives.

14a. Sales tax A. impacts poor and rich families in the same way because everyone pays the same percentage. B. is relatively more expensive to the rich than to the poor. C. is relatively more expensive to the poor than to the rich. D. is a relatively small expense for both the rich and the poor.

C. is relatively more expensive to the poor than to the rich.

17B

Graph

12c. Another tool of the U.S. government is to provide BLANK transfers, such as SNAP benefits, instead of cash.

IN-KIND

13B Your friend always pays his rent on time, but he earns so little that he often doesn't have enough food at the end of the month. You recommend that he look into BLANK , which BLANK means-tested.

SNAP, is

12a Consider the tools that the government uses to help ensure aid goes to those in need. a. The social safety net programs fall into one of two categories: a means-based or social insurance. b. relative or absolute. c. progressive or regressive. d. wealth or income.

a means-based or social

5a. When the original poverty line was created, even some people living above the poverty line did not have access to a phone or running water in their homes. Today, running water is expected. Beyond that, the norm for our contemporary society includes having cell phones and internet access. In fact, the U.S. government provides grants to bring high-speed in-home internet access to underserved rural areas. Consider both the benefits and the shortcomings of the U.S. poverty line as a means of assessing poverty today. a. The U.S. poverty line was originally set at a three times the cost of a low-cost food plan. b sufficient income to provide for a family of four. c one-third of the median income in the United States. d an income level of $1.90 per day.

a. The U.S. poverty line was originally set ata three times the cost of a low-cost food plan.

4b. The poverty line is a(n) BLANK measure of poverty.

absolute

5b. The current U.S. poverty line measures BLANK poverty in that it measures the adequacy of resources relative to BLANK.

absolute, an unchanging standard

17d. Which of the following are drawbacks to redistribution of income? Select all that apply. 1. The administrative costs will reduce the amount of money to be redistributed. 2. Income redistribution reduces the incentive to work. 3. Income redistribution leads to more tax avoidance.

all of them

5c. Items or utilities that are considered essential in present-day U.S. society a. include access to adequate nutrition exclusively. b include a vehicle, a cell phone, and access to adequate nutrition. c. are determined by the U.S. government. d. are not universally agreed upon.

are not universally agreed upon

1b. Why is it important to consider more than just annual income when assessing inequality? a. Imports and exports should also be counted to get a full picture or earnings. b. The poverty rate is based on diminishing marginal utility, which depends on more than income. c. Living standards and the quality of life encompass more than just current income. d. Illegal activities skew GDP and GNP, and this impacts citizens' incomes.

c. Living standards and the quality of life encompass more than just current income.

11a Renika has several thousand dollars in wealth, but she is classified as living in poverty. a. How is this possible? a. Her annual income is below the poverty line. b. She does not report all of her wealth. c. Her wealth is below the poverty line. d. She is a college student living in the dorms.

c. about 15% more than the average household.

9 If your parents earn about 30% more than the average household, according to studies, how much more or less than the average should you expect to make? You should expect to make a. about 30% more than the average household. b. about 15% less than the average household. c. about 15% more than the average household. d. the same as the average household.

c. about 15% more than the average household.

David, a coworker, just read an article about the "poverty trap" in the U.S. During the lunch break, he mentions that it is unfortunate that everyone in poverty is stuck there forever. David's observation is a. correct because low-income workers face too much discrimination to escape poverty. b. incorrect because the social safety net provides a way for low-income individuals to escape poverty. c. correct. Because of a high effective marginal tax rate, people living in poverty have no way to increase their incomes to higher quintiles. d. incorrect because many people experience poverty at some point in their lives, particularly when they are young.

d. incorrect because many people experience poverty at some point in their lives, particularly when they are young.

15 At a classroom holiday party, there is a slight shortage of soda, so that three people will not have any if everyone at the front of the line fills their cups. a. The instructor suggests that everyone fill their glasses only two-thirds, so that everyone can have something to drink. This is an example of BLANK.

fairness in equality of outcomes

15b. A student at the front of the line says that everyone had the same chance to line up, and therefore, those who were goofing around and ended up at the back of the line should have water instead. This is an example of BLANK.

fairness in the process

12b. For BLANK aid qualification, people receiving aid must meet low income requirements, while BLANK aid is designed to in insure everyone against bad outcomes.

means-based, social insurance

13d. Your friend and his family were doing fine, but since the birth of their new child, their income has been strained. He worries about providing medical care for his baby. You recommend that he look into BLANK , which BLANK means-tested.

medicaid, is

6Suppose you are out for dinner with friends, and two of them begin arguing. One says that the rich pay higher taxes, and the other argues that the rich pay lower taxes by cheating the system. Consider the validity of each statement. Based on the BLANK income tax system in the United States, the rich should generally pay higher taxes. However, many rich individuals take advantage of BLANK in order to lower their effective tax rate. Using this method to lower your tax rate is BLANK.

progressive , special exclusions , legal

14b. A sales tax is BLANK .

regressive

15c. Which option do you think a utilitarian would choose?

senario a

3

table

8

table

For each situation, imagine that a friend, knowing you have studied economics, comes to you for some advice. For each scenario, identify a government assistance option that may be available to them. a. Your friend has been employed by the same company for two years but was recently laid off. She needs support while she searches for another job. You recommend that she look into BLANK , which BLANK means-tested.

unemployment insurance, is not

11b. BLANK includes not only savings but also investments and other assets.

wealth

13c. Your friend fell while at work and broke her leg. She will not be able to return to work and do her job properly until the injury fully heals. You recommend that she look into , BLANK which BLANK means-tested.

workers compensation, is not