Review Questions

Share of Income 1979 1991 Top quintile 39.7% 42.9% Fourth quintile 24.8% 22.7% Middle quintile 17.0% 16.3% Second quintile 11.5% 11.5% Bottom quintile 7.0% 6.6% TABLE 15.9Income Distribution in the United Kingdom, 1979 and 1991 8 . Using two demand and supply diagrams, one for the low-wage labor market and one for the high-wage labor market, explain how information technology can increase income inequality if it is a complement to high-income workers like salespeople and managers, but a substitute for low-income workers like file clerks and telephone receptionists. 9 . Using two demand and supply diagrams, one for the low-wage labor market and one for the high-wage labor market, explain how a program that increased educational levels for a substantial number of low- skill workers could reduce income inequality. 10 . Here is one hypothesis: A well-funded social safety net can increase economic equality but will reduce economic output. Explain why this might be so, and sketch a production possibility curve that shows this tradeoff. 11 . Here is a second hypothesis: A well-funded social safety net may lead to less regulation of the market economy. Explain why this might be so, and sketch a production possibility curve that shows this tradeoff. 12 . Which set of policies is more likely to cause a tradeoff between economic output and equality: policies of redistribution or policies aimed at the ladder of opportunity? Explain how the production possibility frontier tradeoff between economic equality and output might look in each case. 13 . Why is there reluctance on the part of some in the United States to redistribute income so that greater equality can be achieved?

Review Questions

14 . How is the poverty rate calculated? 15 . What is the poverty line? 16 . What is the difference between poverty and income inequality? 17 . How does the poverty trap discourage people from working? 18 . How can the effect of the poverty trap be reduced? 19 . How does the U.S. government specifically support elderly people experiencing poverty? 20 . What is the safety net? 21 . Briefly explain the differences between TANF, the earned income tax credit, SNAP, and Medicaid. 22 . Who is included in the top income quintile? 23 . What is measured on the two axes of a Lorenz curve? 24 . If a country had perfect income equality what would the Lorenz curve look like? 25 . How has the inequality of income changed in the U.S. economy since the late 1970s? 26 . What are some reasons why a certain degree of inequality of income would be expected in a market economy? 27 . What are the main reasons economists give for the increase in inequality of incomes? 28 . Identify some public policies that can reduce the level of economic inequality. 29 . Describe how a push for economic equality might reduce incentives to work and produce output. Then describe how a push for economic inequality might not have such effects.

Critical Thinking Questions

30 . What goods and services would you include in an estimate of the basic necessities for a family of four? 31 . If a family of three earned $20,000, would they be able to make ends meet given the official poverty threshold? 32 . Exercise 15.2 and Exercise 15.3 asked you to describe the labor-leisure tradeoff for Jonathon. Since, in the first example, there is no monetary incentive for Jonathon to work, explain why he may choose to work anyway. Explain what the opportunity costs of working and not working might be for Jonathon in each example. Using your tables and graphs from Exercise 15.2 and Exercise 15.3, analyze how the government welfare system affects Jonathan’s incentive to work. 33 . Explain how you would create a government program that would give an incentive for labor to increase hours and keep labor from falling into the poverty trap. 34 . Many critics of government programs to help low-income individuals argue that these programs create a poverty trap. Explain how programs such as TANF, EITC, SNAP, and Medicaid will affect low-income individuals and whether or not you think these programs will benefit families and children. 35 . Think about the business cycle: during a recession, unemployment increases; it decreases in an expansionary phase. Explain what happens to TANF, SNAP, and Medicaid programs at each phase of the business cycle (recession, trough, expansion, and peak). 36 . Explain how a country may experience greater equality in the distribution of income, yet still experience high rates of poverty. Hint: Look at the Clear It Up "How do governments measure poverty in low-income countries?" and compare to Table 15.5. 37 . The demand for skilled workers in the United States has been increasing. To increase the supply of skilled workers, many argue that immigration reform to allow more skilled labor into the United States is needed. Explain whether you agree or disagree. 38 . Explain a situation using the supply and demand for skilled labor in which the increased number of college graduates leads to depressed wages. Given the rising cost of going to college, explain why a college education will or will not increase income inequality. 39 . What do you think is more important to focus on when considering inequality: income inequality or wealth inequality? 40 . To reduce income inequality, should the marginal tax rates on the top 1% be increased? 41 . Redistribution of income occurs through the federal income tax and government antipoverty programs. Explain whether or not this level of redistribution is appropriate and whether more redistribution should occur.