Economics Chapter 18 The Accompanying Table Contains Data On The U.S. Economy For The Years 1983 And 2015

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Chapter 18

The Economics of the

Welfare State

1. The accompanying table contains data on the U.S. economy for the years 1983

and 2015. The second column shows the poverty threshold. The third column

shows the consumer price index (CPI), a measure of the overall level of prices.

And the fourth column shows U.S. gross domestic product (GDP) per capita, a

measure of the standard of living.

Poverty

Data from: U.S. Census Bureau; Bureau of Labor Statistics; Bureau of Economic Analysis.

a. By what factor has the poverty threshold increased from 1983 to 2015? That is,

has it doubled, tripled, and so on?

b. By what factor has the CPI (a measure of the overall price level) increased

from 1983 to 2015? That is, has it doubled, tripled, and so on?

c. By what factor has GDP per capita (a measure of the standard of living)

increased from 1983 to 2015? That is, has it doubled, tripled, and so on?

2015. That is, it has roughly qaudrupled.

d. Since the standard of living has grown more rapidly than the poverty thresh-

2. In the city of Metropolis, there are 100 residents, each of whom lives until

age 75. Residents of Metropolis have the following incomes over their life–

time: Through age 14, they earn nothing. From age 15 until age 29, they earn

75. Each year, everyone consumes whatever their income is that year (that is,

S-262 Chapter 18 The economics of The Welfare sTaTe

a. Study the income distribution among all residents of Metropolis. Split the

population into quintiles according to their income. How much income does a

resident in the lowest quintile have? In the second, third, fourth, and top quin–

tiles? What share of total income of all residents goes to the residents in each

quintile? Construct a table showing the share of total income that goes to each

quintile. Does this income distribution show inequality?

b. Now look only at the 20 residents of Metropolis who are currently 40 years

old, and study the income distribution among only those residents. Split those

20 residents into quintiles according to their income. How much income does

a resident in the lowest quintile have? In the second, third, fourth, and top

quintiles? What share of total income of all 40-year-olds goes to the residents

in each quintile? Does this income distribution show inequality?

2. a. Each quintile will contain 100/5 = 20 citizens. Total income in Metropolis

among all citizens is (20 × 0) + (20 × 200) + (20 × 400) + (20 × 300) + (20 × 100) =

20,000. The citizens in the lowest quintile are the 10-year-olds, with income of

0 metros each, for a total income in that quintile of 0 metros, which is 0% of

the total income. The citizens in the second quintile are the 70-year-olds, with

income of 100 metros each, for a total income in that quintile of 20 × 100 =

2,000 metros, which is 2,000/20,000 = 10% of the total income. The citizens in

Quintile Share of total income

Lowest 0%

Second 10

b. All 40-year-olds have the same income: 400 metros. Each quintile will con-

tain 20/5 = 4 citizens. That is, the citizens in the lowest quintile (the lowest

four earners) have income of 400 metros. The citizens in the second quintile

(the next higher four earners) also have income of 400 metros, and so on.

c. These examples show how looking at the overall income distribution can

overstate the true degree of inequality. Since incomes tend to vary over the

Solution

3. The accompanying table presents data from the U.S. Census Bureau on median

and mean income of male workers for the years 1972 and 2015. The income

figures are adjusted to eliminate the effect of inflation.

Year

Median income Mean income

(in 2015 dollars)

Data from: U.S. Census Bureau.

a. By what percentage has median income changed over this period? By what

percentage has mean income changed over this period?

$622. In percentage terms this is a fall of $622/$37,760 = 1.6%. However, mean

(or average) income has increased by $10,991; in percentage terms this is an

4. There are 100 households in the economy of Equalor. Initially, 99 of them have

an income of $10,000 each, and one household has an income of $1,010,000.

a. What is the median income in this economy? What is the mean income?

Through its poverty programs, the government of Equalor now redistributes

income: it takes $990,000 away from the richest household and distributes it

equally among the remaining 99 households.

b. What is the median income in this economy now? What is the mean income?

Has the median income changed? Has the mean income changed? Which indi-

4. a. The median income is the income of the household in the exact middle of the

income distribution. The exact middle of 100 households is in between the

49th and the 50th household; but since both of those households have income

b. After this redistribution, all households now have income of $20,000. So

the median household income is $20,000. The mean (or average) household

income is (100 × $20,000)/100 = $20,000. Note that although the median house–

hold income has increased, the mean household income has remained the

Solution

S-264 Chapter 18 The economics of The Welfare sTaTe

5. The country of Marxland has the following income tax and social insurance

system. Each citizen’s income is taxed at an average tax rate of 100%. A social

insurance system then provides transfers to each citizen such that each citi-

5. If each citizen is taxed at an average tax rate of 100%, his or her income is

entirely taxed away. Each citizen then receives an equal share of the total tax

revenue. So the incentive for an individual citizen is not to work at all, to pay

6. The tax system in Taxilvania includes a negative income tax. For all incomes

below $10,000, individuals pay an income tax of −40% (that is, they receive a

payment of 40% of their income). For any income above the $10,000 threshold,

the tax rate on that additional income is 10%.

a. For each scenario in the table, calculate the amount of income tax to be paid

and after-tax income.

b. Can you find a situation in this tax system where earning more pre–tax income

actually results in less after-tax income? Explain.

6. a. 1. The income tax on the first $10,000 is −40%, and since Lowani does not earn

2. The income tax on the first $10,000 is −40%, so on that income Midram

pays −0.4 × $10,000 = −$4,000. On the next $30,000 of his income, Midram

3. The income tax on the first $10,000 is −40%, so on that income Hi–Wan

pays −0.4 × $10,000 = −$4,000. On the next $90,000 of his income, Hi-Wan

pays 10% taxes, so his tax payment on that portion of his income is 0.10 ×

$90,000 = $9,000. Overall, Hi-Wan pays income tax of −$4,000 + $9,000 =

Solution

7. In the city of Notchingham, each worker is paid a wage rate of $10 per hour.

Notchingham administers its own unemployment benefit, which is structured as

follows: If you are unemployed (that is, if you do not work at all), you get unem-

a. How much income does an unemployed person have per day? How much daily

income does an individual who works four hours per day have? How many

hours do you need to work to earn just the same as if you were unemployed?

b. Will anyone ever accept a part-time job that requires working four hours per

day, rather than being unemployed?

7. a. An unemployed person has $50 income per day. An individual who works four

hours per day has daily income of $40. If you worked five hours per day, you

would earn equally as much as if you were unemployed.

c. If $0.50 of the unemployment benefit is withdrawn for every earned dollar of

income, for an individual who works four hours per day and so has earned

8. The accompanying table shows data on the total number of people in the United

States and the number of all people who were uninsured, for selected years from

2003 to 2015. It also shows data on the total number of poor children in the

United States—those under 18 and below the poverty threshold—and the num–

ber of poor children who were uninsured.

Year

Total

people

Uninsured

people

Total poor

children

Uninsured poor

children

(millions)

2005 293.8 44.8 12.9 8.0

2009 304.3 50.7 15.5 7.5

2013 313.1 41.8 15.8 5.4

Data from: U.S. Census Bureau.

For each year, calculate the percentage of all people who were uninsured and the

percentage of poor children who were uninsured. How have these percentages

changed over time? What is a possible explanation for the change in the percent-

age of uninsured poor children?

Solution

8. The accompanying table calculates the percentages of all uninsured people in

the United States and the percentages of uninsured poor children.

Year

Uninsured

people

Uninsured

poor children

2003 15% 64%

2005 15 62

2011 16 43

2013 13 34

2015 931

The percentage of all uninsured people in the United States had been relatively

steady through 2011. However, with the implementation of the Affordable Care

Act in 2014, the number of uninsured Americans has been reduced by over

20 million people. The total percentage of uninsured has dropped from a high of

17% in 2009 to under 9% by 2015.

Even prior to the arrival of the ACA, the percentage of uninsured poor chil-

dren had fallen dramatically—even in 2009, when the percentage of uninsured

9. The American National Election Studies conducts periodic research on the

opinions of U.S. voters. The accompanying table shows the percentage of people,

in selected years from 1952 to 2012, who agreed with the statement “There are

important differences in what the Republicans and Democrats stand for.”

What do these data say about the degree of partisanship in U.S. politics

over time?

9. Clearly, voters increasingly feel that the degree of partisanship in U.S. politics

10. For this Discovering Data exercise, go to FRED (fred.stlouisfed.org) to

create a line graph that compares poverty rates for different counties

across the United States. In the search bar enter “Estimated Percent of People of

All Ages in Poverty for United States” and select the subsequent series. Follow

the steps below to add the series for additional counties. Then answer the

questions that follow.

i. Select “Edit Graph” and under “Add Line” enter “Estimated Percent of People

in Poverty for Wayne County, MI,” which includes Detroit, Michigan.

Solution

Chapter 18 The economics of The Welfare sTaTe S-267

iii. San Francisco County/City, CA (for San Francisco, California)

iv. Cuyahoga County, OH (for Cleveland, OH)

iii. In the graph frame change the start date to 1997-01-01 and the end date to

2014–01-01.

a. Which counties have the lowest poverty rates? Highest? How do poverty rates

compare to the national average?

b. How has the difference in poverty rates changed from 2004 (prior to the Great

Recession) to 2012 (after the Great Recession)?

11. In a private insurance market, there are two different kinds of people: some who

are more likely to require expensive medical treatment and some who are less

likely to require medical treatment and who, if they do, require less expensive

treatment. One health insurance policy is offered, tailored to the average per-

son’s health care needs: the premium is equal to the average person’s medical

expenses (plus the insurer’s expenses and normal profit).

b. Could this system overcome the problem created by adverse selection?

c. How does the British National Health Service avoid these problems?