Subjective Short Answer
1. Who said “The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of socialism is the
equal sharing of miseries”?
2. Approximately what fraction of total income in the US economy comes from labor earnings?
3. If greater equality is the benefit of government intervention into the allocation of society’s resources, what is the cost?
4. Since 1970, has the distribution of income in the US become more equal, less equal, or remained unchanged?
5. In 2011, the top 20% of US families had more than times as much income as the bottom 20%.
6. Of the following countries, which has the most equal distribution of income? United States, Brazil, Mexico, China,
Japan, Germany, United Kingdom, Russia
Japan
7. The percentage of the population whose family income falls below an absolute level is call the
poverty rate.
8. The poverty rate is the percentage of the population whose family income falls below an absolute level called the .
poverty line
9. What measure does the federal government use when setting the official poverty line in the US?
three times the cost of providing an adequate diet
Table 20–13
Distribution of Income in Imagination
Number of Families
Income Range
23,500
less than $18,000
42,410
between $18,000 and $36,000
57,330
between $36,000 and $54,000
63,490
between $54,000 and $72,000
24,770
between $72,000 and $90,000
23,500
more than $90,000
10. Refer to Table 20–13. If the poverty rate in Imagination is 10%, what is the poverty line?
11. Refer to Table 20–13. If the poverty line in Imagination is $18,000, what is the poverty rate?
12. Refer to Table 20–13. If the poverty rate in Imagination is 25%, in what income range on the table is the poverty line?
13. Refer to Table 20–13. The Human Development Report computes a measure of inequality by dividing the income of
the richest 10% of the population by the income of the poorest 10%. What is the value for this measure of inequality in
Imagination?
14. Refer to Table 20–13. The Human Development Report computes a measure of inequality by dividing the income of
the richest 10% of the population by the income of the poorest 10%. If the value for this measure of inequality in the US is
15.9 and the value for India is 8.6, how does Imagination compare to these two nations?
Table 20–14
Income Inequality in the United States
The values in the table reflect the percentages of pre-tax-and transfer income.
Year
Bottom Fifth
Second Fifth
Middle Fifth
Fourth Fifth
Top Fifth
Top 5%
2010
3.3%
8.5%
14.6%
23.4%
50.2%
21.3%
2005
3.4
8.6
14.6
23.0
50.4
22.2
2000
3.6
8.9
14.8
23.0
49.8
22.1
1995
3.7
9.1
15.2
23.3
48.7
21.0
1990
3.8
9.6
15.9
24.0
46.6
18.5
1985
3.9
9.8
16.2
24.4
45.6
17.6
1980
4.2
10.2
16.8
24.7
44.1
16.5
15. Refer to Table 20–14. The trend in income inequality from 1980 to 2010 is .
increasing
16. Refer to Table 20–14. If the distribution of income were completely equal, what percentage of income would the
bottom fifth of the population earn?
17. Refer to Table 20–14. In 2010, how many more percentage points of total income did the top fifth of the population
earn compared to if the income distribution were completely equal?
30.2%
18. Refer to Table 20–14. In 2010, what percentage of total income in the US did the bottom 20% of families have?
3.3%
19. Refer to Table 20–14. In percentage terms, how much less income did the bottom 40% of families have in 2010 than
in 1980?
20. With which three demographic variables is poverty correlated?
21. Of the following groups, which group is most likely to live in poverty – children, elderly, married-couple families,
female household with no spouse present?
22. Of the following groups, which group is least likely to live in poverty – whites, blacks, Hispanics, Asians?
Table 20–15
Income Inequality in 2010 in the United States by Race
The values in the table reflect the percentages of pre-tax-and-transfer income.
Race
Bottom Fifth
Second Fifth
Middle Fifth
Fourth Fifth
Top Fifth
Top 5%
Asians
3.0%
8.9%
15.3%
24.5%
48.3%
19.0%
Blacks
2.7
7.9
14.2
23.6
51.6
21.4
Hispanics
3.5
9.0
14.7
23.3
49.4
20.6
Whites
3.6
8.8
14.9
23.4
49.3
21.0
Source: US Census Bureau
23. Refer to Table 20–15. Which race shows the least equal distribution of income?
Blacks
24. Refer to Table 20–15. In percentage point terms, how much more did the top 5% of the Asian population earn than it
would have if income were distributed equally?
25. What is the primary problem in comparing income inequality in the US with income inequality in other countries?
26. Goods and services given to the poor such as food stamps, housing vouchers, and medical services are called
27. If in-kind transfers were included in income at their market value, what would happen to the number of families below
the poverty line?
28. The regular pattern of income variation over a person’s life is called the .
29. The life-cycle pattern of income variation causes inequality in the distribution of annual income, but it does not
necessarily represent .
30. People can borrow and lend money to smooth out short term variations in income known as what kind of changes?
31. On what type of income do many economists believe that people base their consumption?
32. Economists Cox and Alm compared the gap between rich and poor and found that the richest 20% was about 15 times
better off than the poorest 20% when they compared what data?
33. Economists Cox and Alm compared the gap between rich and poor and found that the richest 20% was about 2 times
better off than the poorest 20% when they compared what data?
34. In a typical 10-year period, about one in four families falls below the poverty line in at least one year. What
percentage of families are poor for eight or more years?
35. If a father earns 20% above his generation’s average income, his son will most likely earn what percent above his
generation’s average income? What does this statistic indicate?
36. In the US, is it more likely that someone will become a millionaire by making money on his/her own or by inheriting a
fortune?
37. Which political philosophy argues that the government should choose policies to maximize the total utility of
everyone in society?
38. What is the term for a measure of happiness or satisfaction a person receives from his or her circumstances?
39. Which political philosophy argues that the government should choose policies deemed just, as evaluated by an
impartial observer?
40. Which philosopher claimed that the government should aim to maximize the well-being of the worst-off person in
society?
41. Jermaine believes that it is important to maximize the well-being of the worst-off person in society. He believes in the
principle called the .
42. A government policy aimed at protecting people against the risk of adverse events is called .
43. Which of the three political philosophies discussed in the textbook, if any, view the total income of society as a shared
resource that a social planner can freely redistribute to achieve some social goal?
44. Which political philosophy concludes that equality of opportunities is more important than equality of outcomes?
45. Which of the three political philosophies discussed in the textbook, if any, think the government should not take from
some individuals and give to others to achieve any particular distribution of income?
46. With a minimum wage law, the workers who remain employed benefit from a .
47. Aniella believes that the demand for unskilled labor is relatively inelastic. Carmella believes that the demand for
unskilled labor is relatively elastic. Which is an advocate of minimum-wage laws?
48. Aniella believes that the demand for unskilled labor is relatively inelastic. Carmella believes that the demand for
unskilled labor is relatively elastic. Which believes that a minimum-wage law will result in significant unemployment?
49. Temporary Assistance for Needy Families (TANF) and Supplemental Security Income (SSI) are examples of .
50. Suppose the government used the following formula to compute a family’s tax liability:
Taxes owed = 28% of income – $8,000. How much would a family that earned $75,000 owe?
51. Suppose the government used the following formula to compute a family’s tax liability:
Taxes owed = 28% of income – $8,000. How much would a family that earned $18,000 owe?
Scenario 20-7
Zooey is a single mother of two young children whose husband died in a tragic car accident. She earns $20,000 per year
working as a cashier at a grocery store. The government uses a negative income tax system in which
Taxes owed = (1/4 of income) – $15,000.
52. Refer to Scenario 20–7. Does Zooey owe or receive money from the government? How much?
53. Refer to Scenario 20–7. One of Zooey’s friends tells her she would have more money for the year if she quit her job
and filed her tax return with $0 in income. Is her friend correct? Why or why not?
54. Refer to Scenario 20–7. Zooey’s friend Alfredo owes $0 in taxes. How much does he earn?
55. Refer to Scenario 20–7. Zooey’s brother Zander owes $10,000 in taxes. How much does he earn?
56. The Earned Income Tax Credit (EITC) is a tax provision that allows poor working families to receive income tax
refunds greater than the taxes they paid during the year. Therefore, the EITC works much like a .
57. What is one argument made by proponents of in-kind transfers over cash payments to the needy?
58. A system in which anyone collecting antipoverty program benefits must accept a government-provided job is called .
59. One way of expressing the tradeoff between income equality and efficiency is to say the more equally the pie is
divided, the .
60. Explain the relationship between labor earnings and the distribution of income.
61. What is meant by a perfectly equal distribution of income? Use a graph to depict such a situation.
all income, 60 percent of all families would receive 60 percent of all income, etc.
62. Given the table shown, which country has a more equal income distribution? Explain your answer.
Country
Bottom Fifth
Second Fifth
Middle Fifth
Fourth Fifth
Top Fifth
Country A
9.0%
13.5%
17.5%
22.9%
37.1%
Country B
4.8%
10.5%
16.0%
23.5%
45.2%
closer to that situation than Country B.
63. Explain what information is contained in the poverty rate statistic. Are there problems in using an absolute scale to
measure poverty? If so, explain them.
level indicates if they receive in-kind transfers. Finally, it is very difficult to measure a true
64. Compare and contrast the “life cycle” hypothesis and the “permanent income” hypothesis. What are their respective
implications for inequality in the income distribution?
65. Explain the concept of diminishing marginal utility, and describe the role that it plays in the utilitarian argument for
the redistribution of income.
66. Explain how a “leaky bucket” can be used to illustrate the utilitarian argument that governments should not attempt to
completely equalize individual incomes.
67. Briefly describe the three prominent schools of thought in political philosophy. Identify one of the most well-known
philosophers in each school.
agreements but not redistribute income that was fairly earned (not stolen). Libertarians
Robert Nozick was a libertarian.
68. The table below reflects the levels of total utility received from income for each of four members of a society.
Income
Peter
Paul
Mary
Jane
$1
15
32
20
16
$2
29
61
38
30
$3
42
87
54
42
$4
54
110
68
52
$5
65
130
80
60
$6
75
147
90
66
$7
84
161
98
70
$8
92
172
103
72
a.
Assume that the society has the following income distribution:
Peter $3
Paul $7
Mary $5
Jane $3
Is it possible for the government to increase total aggregate utility by redistributing
income among members of society? Explain your answer.
b.
Assume that the government has $19 to allocate among the four members of society.
(Assume that no one has any income to start with.) If the government is interested in
distributing income in a way that maximizes aggregate total utility, how should it
distribute the $19 of income?
c.
Does the table above describe a situation characterized by diminishing marginal utility?
Explain your answer.
a.
Jane $3
c.
Yes. Marginal utility declines as income increases for each person.
69. Assume that the government proposes a negative income tax that calculates taxes owed by the following formula,
Taxes Owed = (1/3 Income) – $10,000.
Compute the tax that would be owed given each level of income.
a.
$120,000
b.
$90,000
c.
$60,000
d.
$30,000
e.
$0
a.
$30,000
b.
$20,000
c.
$10,000
d.
$0
e.
No taxes will be owed. Instead, the family/person would receive a subsidy of $10,000
70. Assume that the government proposes a negative income tax that calculates taxes owed by the formula, Taxes Owed =
(a Income) – b. A family with an income of $40,000 pays $5,000 in taxes, and a family with an income of $12,000
receives an income subsidy of $2,000.
a.
What is the value for “a”?
b.
What is the value for “b”?
c.
What is the tax liability of a family with an income of $50,000?
d.
At what level of income will a family neither pay taxes, nor receive an income subsidy?
a.
0.25 or 25%
b.
$5,000
c.
$7,500
d.
$20,000
71. Explain what is meant by “in-kind transfer” programs. Briefly outline the advantages and disadvantages of an in-kind
transfer program.
72. Assume you are a critic of welfare reforms that impose a time limit on the number of years a person is eligible for
welfare benefits. What is the foundation of your critique?
73. Outline the possible work disincentives created by anti-poverty programs. Is there a way to solve this problem without
causing other forms of inefficiency to arise? Explain your answer.