Exercise Set 17
INCOME INEQUALITY

1. Suppose income is equally distributed among all households.
   1. What would the Lorenz curve look like?
   2. What is the value of the Gini coefficient?
   3. Is such an income distribution desirable? Explain.
      
      
2. What are the causes of income inequality in society -- i.e., why do some earn more than others?
   
   
3. How do choices made by individuals influence income distribution in society? In particular, think about a person's decision to earn an education.
   
   
4. Suppose Brazil has a more unequal income distribution than Hungary.
   1. Sketch the Lorenz curves for the two countries (same graph).
   2. Which country has a higher Gini coefficient? Explain.
      
      
5. Consider the income distribution in two countries. The Gini coefficient for Country A is 0.15 while that for Country B is 0.42.
1. Provide a sketch of the Lorenz curves for both countries.
2. How is the Gini coefficient defined?
3. "The above Gini coefficients imply that Country A's income distribution is more unequal than that of Country B." Comment.
   
   
6. Provide three examples of programs that are meant to reduce income inequality. What are the pros and cons of these programs?
   
   
7. The effect of income redistribution programs is generally to [reduce / increase] the Gini coefficient. Explain.
   
   
8. Higher the degree of income inequality in a country:
   1. Lower is the Gini coefficient
   2. Smaller is the area between the 45-degree line and the Lorenz curve.
   3. The closer is the Lorenz curve to the 45-degree line.
   4. All of the above.
   5. None of the above.
      
      
9. As a country's income distribution becomes more unequal:
   1. The Gini coefficient becomes larger.
   2. The area between the 45-degree line and the Lorenz curve becomes smaller.
   3. The Lorenz curve becomes closer to the 45-degree line.
   4. All of the above occur.
   5. Both (b) and (c) occur.
   
   
10. Consider the US tax system and its progressivity. Tax rates for 2020 are given in the table below (source: IRS).
    
    

    Tax Rate	Taxable Income (Single)
    10%	Up to $9,875
    12%	$9,876 to $40,125
    22%	$40,126 to $85,525
    24%	$85,526 to $163,300
    32%	$163,301 to $207,350
    35%	$207,351 to $518,400
    37%	Over $518,400

    
    
    
    1. Select a value for taxable income in the first tax bracket. Compute the tax amount, the marginal tax rate, and the average tax rate. (Use the calculator below to confirm your calculations.)
    2. Select a value for taxable income in each of the other 6 tax brackets. Compute the tax amount, the marginal tax rate, and the average tax rate in each case.
    3. Which is larger--the marginal tax rate or the average tax rate? Why?

    Taxable income = $

    Tax amount = $

    Marginal tax rate = %

    Average tax rate = %