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14) The table above gives cumulative percent of income received by each 20 percent group of
households. Label the figure below and then plot the Lorenz curves. In which nation is income
more equally distributed?
19.7 Essay: How Inequality and Poverty Arise
1) What is "human capital" and why is it considered an investment?
2) What is "human capital"? How is it important in the determination of a worker's wage rate?
3) How is human capital acquired?
4) How does the demand for high-skilled workers compare to the demand for low-skilled
workers? Why does this difference exist?
5) How does an increase in the cost to acquire a skill affect the vertical distance between the
supply curves of high-skilled and low-skilled workers?
6) At any wage rate, the quantity of welders willing to work is less than the quantity of tomato
pickers. Why?
7) Fully explain why it is a good idea for young people who are considering dropping out of high
school to stay in school if the U.S. government pursues more liberal immigration policies over
the next 20 years.
8) Describe the effect education and training have on outcomes in the labor market.
19.8 Essay: Income Redistribution
1) What are the three ways that the government redistributes income in the United States?
Briefly discuss each.
2) What are three programs that redistribute income in the United States by making direct
payments to people? Who benefits from each program?
3) A government redistribution of income program is proposed with the aim of making the
income distribution the same as the 45° line in a Lorenz curve diagram. What implications does
the idea of the "big tradeoff" have for the program?
4) Describe how a negative income tax works.
5) The table below shows the distribution of market income in an economy. The government
redistributes income by collecting income taxes and paying benefits shown in the table.
a. Calculate the income shares of each 20 percent of households after tax and redistribution.
b. In the figure below, draw the Lorenz curves for this economy, both before and after taxes and
benefits.
6) Suppose the government implements a negative income tax with a minimum guaranteed
income of $20,000 and a tax rate of 30 percent on market income.
a. What amount of tax would be paid by a household with no market income?
b. What amount of tax would be paid by a household earning $100,000 of market income?
7) Assume a negative income tax is set up with a 20 percent tax rate on market income and a
guaranteed minimum income of $9,000.
a. What is the amount of taxes a household with $23,000 of market income pays or the amount
of taxes this household receives?
b. What is the amount of taxes a household with $65,000 of market income pays or the amount
of taxes this household receives?
