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Chapter 23 - Income Inequality, Poverty, and Discrimination
Chapter 23 - Income Inequality, Poverty, and Discrimination
McConnell Brue Flynn 21e
DISCUSSION QUESTIONS
1. Use quintiles to briefly summarize the degree of income inequality in the United States. How
and to what extent does government reduce income inequality? LO1
2. Assume that Al, Beth, Carol, David, and Ed receive incomes of $500, $250, $125, $75, and
$50, respectively. Construct and interpret a Lorenz curve for this five-person economy. What
percentage of total income is received by the richest quintile and by the poorest quintile? LO1
23-2
3. How does the Gini ratio relate to the Lorenz curve? Why can’t the Gini ratio exceed 1? What is
implied about the direction of income inequality if the Gini ratio declines from 0.42 to 0.35? How
would one show that change of inequality in the Lorenz diagram? LO1
4. Why is the lifetime distribution of income more equal than the distribution in any specific
year? LO1
Chapter 23 - Income Inequality, Poverty, and Discrimination
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5. Briefly discuss the major causes of income inequality. With respect to income inequality, is
there any difference between inheriting property and inheriting a high IQ? Explain. LO2
6. What factors have contributed to increased income inequality since 1975? LO3
7. Should a nation’s income be distributed to its members according to their contributions to the
production of that total income or according to the members’ needs? Should society attempt to
equalize income or economic opportunities? Are the issues of equity and equality in the
distribution of income synonymous? To what degree, if any, is income inequality equitable? LO4
Chapter 23 - Income Inequality, Poverty, and Discrimination
8. Do you agree or disagree? Explain your reasoning. “There need be no trade-off between
equality and efficiency. An ‘efficient’ economy that yields an income distribution that many
regard as unfair may cause those with meager incomes to become discouraged and stop trying. So
efficiency may be undermined. A fairer distribution of rewards may generate a higher average
productive effort on the part of the population, thereby enhancing efficiency. If people think they
are playing a fair economic game and this belief causes them to try harder, an economy with an
equitable income distribution may be efficient as well. LO4
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9. Comment on or explain: LO4
a. Endowing everyone with equal income will make for very unequal enjoyment and satisfaction.
b. Equality is a “superior good”; the richer we become, the more of it we can afford.
c. The mob goes in search of bread, and the means it employs is generally to wreck the bakeries.
d. Some freedoms may be more important in the long run than freedom from want on the part of
every individual.
e. Capitalism and democracy are really a most improbable mixture. Maybe that is why they need
each other—to put some rationality into equality and some humanity into efficiency.
f. The incentives created by the attempt to bring about a more equal distribution of income are in
conflict with the incentives needed to generate increased income.
Chapter 23 - Income Inequality, Poverty, and Discrimination
23-6
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
e. The principles underlying the two systems can be summarized as follows: Each dollar
has a vote in the marketplace, and each person has a vote at the ballot box. These
principles are similar enough that the presence of one often leads to the other. They are
dissimilar enough so that the type of society that arises from a combination of the two
represents a workable social compromise.
f. Incentives created in the attempt to bring about more equal distribution of income may
cause a tradeoff in decreased economic efficiency. Higher marginal taxes may reduce the
efforts of those at the top to work harder and produce more. Greater benefits to those at
the bottom may reduce their incentive to do the same as they receive benefits without the
productive effort. In so far as this tradeoff occurs, there will be a reduction in economic
growth and therefore, damage to incentives leading to increased incomes.
10. How do government statisticians determine the poverty rate? How could the poverty rate fall
while the number of people in poverty rises? Which group in each of the following pairs has the
higher poverty rate: (a) children or people age 65 or over? (b) African Americans or foreign-
born noncitizens? (c) Asians or Hispanics? LO5
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11. What are the essential differences between social insurance and public assistance programs?
Why is Medicare a social insurance program whereas Medicaid is a public assistance program?
Why is the earned-income tax credit considered to be a public assistance program? LO6
12. The labor demand and supply data in the following table relate to a single occupation. Use
them to answer the questions that follow. Base your answers on the taste-for-discrimination
model. LO7
a. Plot the labor demand and supply curves for Hispanic workers in this occupation.
b. What are the equilibrium Hispanic wage rate and quantity of Hispanic employment?
c. Suppose the white wage rate in this occupation is $16. What is the Hispanic-to-white wage
ratio?
d. Suppose a particular employer has a discrimination coefficient d of $5 per hour. Will that
employer hire Hispanic or white workers at the Hispanic-white wage ratio indicated in part c?
Explain.
Chapter 23 - Income Inequality, Poverty, and Discrimination
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e. Suppose employers as a group become less prejudiced against Hispanics and demand 14 more
units of Hispanic labor at each Hispanic wage rate in the table. What are the new equilibrium
Hispanic wage rate and level of Hispanic employment? Does the Hispanic-white wage ratio rise
or fall? Explain.
f. Suppose Hispanics as a group increase their labor services in that occupation, collectively
offering 14 more units of labor at each Hispanic wage rate. Disregarding the changes indicated in
part e, what are the new equilibrium Hispanic wage rate and level of Hispanic employment? Does
the Hispanic-white wage ratio rise, or does it fall?
13. Males under the age of 25 must pay far higher auto insurance premiums than females in this
age group. How does this fact relate to statistical discrimination? Statistical discrimination
implies that discrimination can persist indefinitely, while the taste-for-discrimination model
suggests that competition might reduce discrimination in the long run. Explain the difference.
LO7
Chapter 23 - Income Inequality, Poverty, and Discrimination
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14. Use a demand and supply model to explain the impact of occupational segregation or
“crowding” on the relative wage rates and earnings of men and women. Who gains and who loses
from the elimination of occupational segregation? Is there a net gain or a net loss to society?
Explain. LO7
15. LAST WORD Go to Table 1 in the Last Word and compute the ratio of average wealth to
median wealth for each of the 7 years. What trend do you find? What is your explanation for the
trend? The Federal estate tax redistributes wealth in two ways: by encouraging charitable giving,
which reduces the taxable estate, and by heavily taxing extraordinarily large estates and using the
proceeds to fund government programs. Do you favor repealing the estate tax? Explain.
Chapter 23 - Income Inequality, Poverty, and Discrimination
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REVIEW QUESTIONS
1. Suppose that the United States has a Gini ratio of 0.41 while Sweden has a Gini ratio of 0.31.
Which country has a more equal distribution of income? LO1
a. The United States.
b. Sweden.
c. They are actually equal.
2. Some part of income inequality is likely to be the result of discrimination. But other factors
responsible for inequality include (select as many as apply): LO2
a. Differences in abilities and talents.
b. Differences in education and training.
c. Different preferences for work versus leisure.
d. Different preferences for low-paying but safe jobs relative to high-paying but dangerous jobs.
3. Suppose that a society contains only two members, a lawyer named Monique and a handyman
named James. Five years ago, Monique made $100,000 while James made $50,000. This year,
Monique will make $300,000 while James will make $100,000. Which of the following
statements about this society’s income distribution are true? LO3
Select one or more answers from the choices shown.
a. In absolute dollar amounts, the entire distribution of income has been moving upward.
b. In absolute dollar amounts, the entire distribution of income has been stagnant.
c. The relative distribution of income has become more equal.
d. The relative distribution of income has become less equal.
e. The relative distribution of income has remained constant.
f. The rich are getting richer while the poor are getting poorer.
g. The rich are getting richer faster than the poor are getting richer.
Chapter 23 - Income Inequality, Poverty, and Discrimination
23-11
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Answer:
a. In absolute dollar amounts, the entire distribution of income has been moving
upward.
d. The relative distribution of income has become less equal.
g. The rich are getting richer faster than the poor are getting richer.
The following three statements about this society’s income distribution are true. In
absolute dollar amounts, the entire distribution of income has been moving upward. We
know this to be true because each person in this society has seen his or her income rise
over the past five years.
The relative distribution of income has become less equal. This is true because
Monique’s share of total income has been rising. Five years ago, Monique’s $100,000 of
income represented 2/3 of the society’s total income of $150,000 (= Monique’s $100,000
+ James’ $50,000). But this year, Monique’s $300,000 of income will represent ¾ of the
society’s total income of $400,000 (= Monique’s $300,000 + James’ $100,000). Thus,
income inequality has risen because the share of income earned by the richest member of
this society has increased.
The rich are getting richer faster than the poor are getting richer. This is true because
while James and Monique have both gotten richer, Monique’s increase in income is
larger than James’ increase in income. In particular, Monique’s income has tripled from
$100,000 to $300,000 while James’ income has only doubled from $50,000 to $100,000.
So the rich are getting richer faster than the poor are getting richer.
4. Suppose that the last dollar that Victoria receives as income brings her a marginal utility of 10
utils while the last dollar that Fredrick receives as income brings him a marginal utility of 15
utils. If our goal is to maximize the combined total utility of Victoria and Fredrick, we should:
LO4
a. Redistribute income from Victoria to Fredrick.
b. Redistribute income from Fredrick to Victoria.
c. Not engage in any redistribution because the current situation already maximizes total utility.
d. None of the above.
Chapter 23 - Income Inequality, Poverty, and Discrimination
23-12
5. If women are crowded into elementary education and away from fire fighting, wages in fire
fighting will tend to be than if women weren’t crowded into elementary education. LO7
a. Higher.
b. Lower.
6. In the taste-for-discrimination model, an increase in employer prejudice against African-
American workers would cause the discrimination coefficient to and the demand curve for
African-American labor to shift. LO7
a. Decrease; right.
b. Decrease; left.
c. Increase; right.
d. Increase; left.
PROBLEMS
1. In 2015, Forbes magazine listed Bill Gates, the founder of Microsoft, as the richest person in
the United States. His personal wealth was estimated to be $76 billion. Given that there were
about 322 million people living in the United States that year, how much could each person have
received if Gates’s wealth had been divided equally among the population of the United States?
(Hint: A billion is a 1 followed by 9 zeros while a million is a 1 followed by six zeros.) LO1
Chapter 23 - Income Inequality, Poverty, and Discrimination
23-13
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Feedback: Simply divide Bill Gates’ wealth, $76 billion, by the number of people in the
United States, 322 million. The answer is $236.02 (= $76,000,000,000/322,000,000).
2. Imagine an economy with only two people. Larry earns $20,000 per year while Roger earns
$80,000 per year. As shown in the following figure, the Lorenz curve for this two-person
economy consists of two line segments. The first runs from the origin to point a while the second
runs from point a to point b. LO1
a. Calculate the Gini ratio for this two-person economy using the geometric formulas for the area
of a triangle (= ½ x base x height) and the area of a rectangle (= base x height). Hint: The area
under the line segment from point a to point b can be thought of as the sum of the area of a
particular triangle and the area of a particular rectangle.
b. What would the Gini ratio be if the government taxed $20,000 away from Roger and gave it to
Larry? (Hint: The figure will change.)
c. Start again with Larry earning $20,000 per year and Roger earning $80,000 per year. What
would the Gini ratio be if both their incomes doubled? How much has the Gini ratio changed
from before the doubling in incomes to after the doubling in incomes?
Chapter 23 - Income Inequality, Poverty, and Discrimination
23-14
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Answers: a. The Gini ratio is 0.300.
b. The Gini ratio here is 0.100.
c. The Gini ratio will remain as it was in part (a) at 0.300; the ratio has not changed.
Feedback:
Part a: First, we find the area under the equality line. Using our formula for the area of a
right triangle we have an area of 5,000 (= (1/2) x 100 (base or x-axis) x 100 (height or y-
axis).
Second, we find the area between the two curves. To do this we start by finding the area
UNDER the Lorenz curve (we have easy to use formulas for triangles and rectangles).
See the graph below.
Part b:
100%
Equality Line
100%
Lorenz Curve
50%
20%
A
B
C
Chapter 23 - Income Inequality, Poverty, and Discrimination
23-15
After the tax and redistribution program Larry's new income is $40,000 and Roger's new
income is $60,000. This implies that Larry (50% of the population) now controls 40% of
society's income rather than the 20% before the program.
To calculate the new Gini ratio we use the same procedure as above. However, we use
40% rather than the 20% shown in the diagram.
Part c:
3In 2015, many unskilled workers in the United States earned the federal minimum wage of
$7.25 per hour. By contrast, average earnings in 2015 were about $23 per hour, and certain highly
skilled professionals, such as doctors and lawyers, earned $100 or more per hour. LO6
a. If we assume that wage differences are caused solely by differences in productivity, how many
times more productive was the average worker than a worker being paid the Federal minimum
wage? How many times more productive was a $100-per-hour lawyer compared to a worker
earning minimum wage?
b. Assume that there are 20 minimum-wage workers in the economy for each $100-per-hour
lawyer. Also assume that both lawyers and minimum-wage workers work the same number of
hours per week. If everyone works 40 hours per week, how much does a $100-per hour lawyer
earn a week? How much does a minimum-wage worker earn a week?
c. Suppose that the government pairs each $100-per-hour lawyer with 20 nearby minimum-wage
workers. If the government taxes 25 percent of each lawyer’s income each week and distributes it
equally among the 20 minimum-wage workers with whom each lawyer is paired, how much will
each of those minimum-wage workers receive each week? If we divide by the number of hours
worked each week, how much does each minimum-wage worker’s weekly transfer amount to on
an hourly basis?
d. What if instead the government taxed each lawyer 100 percent before dividing the money
equally among the 20 minimum-wage workers with whom each lawyer is paired—how much per
week will each minimum wage worker receive (assuming the lawyer continues to work)? And
how much is that on an hourly basis?
Chapter 23 - Income Inequality, Poverty, and Discrimination
Feedback:
Part a:
Since wage differences are solely due to differences in productivity in the current
example we can determine how many times more productive one group is relative to
23-17
4. The desire to maximize profits can work against racial and other types of discrimination. To
see this, consider two equally productive accountants named Ted and Jared. Ted is black, and
Jared is white. Both can complete 10 audits per month. LO7
a. Suppose that for any accounting firm that hires either Ted or Jared, all the other costs of
performing an audit (besides paying either Ted or Jared) come to $1,000 per audit. If the going
rate that must be paid to hire an accountant is $7,000 per month, how much will it cost an
accounting firm to produce one audit if it hires either Ted or Jared to do the work?
b. If the market price that accounting firms charge their clients for an audit is $1,800, what would
the accounting profit per audit be for a firm that hired either Ted or Jared? What is the profit rate
as a percentage?
c. Suppose that firm A dislikes hiring black accountants while firm B is happy to hire them. So
Ted ends up working at firm B rather than firm A. If Ted works 11 months per year, how many
audits will he complete for firm B each year? How much in accounting profits will firm B earn
each year from those audits?
d. Since firm A passed on hiring Ted because he was black, firm A is forgoing the profits it could
have earned if it had hired Ted. If the firm is willing to forgo up to $5,000 per year in profit to
avoid hiring blacks, by how many dollars will firm A regret its decision not to hire Ted?
