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# Microeconomics Study Set 31

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## Quiz 18 : Who Gets What the Distribution of Income

Some people in the U.S. argue that the poverty line is too high and some argue that it is too low. Explain both arguments by highlighting the difference between absolute and relative measures of poverty.
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Those who favor a relative measure of poverty argue that the poverty line is too low. They maintain that food expenditures are now about 25% of a family's budget, and therefore, food expenditures should be multiplied by a factor of 4 rather than 3 (the current practice) to calculate the poverty line.
Those who favor an absolute measure of poverty argue that the current poverty line is too high because poverty figures don't include in-kind transfers such as SNAP (formerly known as food stamps). Furthermore, poverty measures do not account for underreporting of income.

How does the Lorenz curve for the U.S. compare to the Lorenz curve for most developing and developed countries? What does this mean?
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In the U.S., the Lorenz curve is closer to the diagonal than is the curve for most developing countries. This means that income is more equally distributed in the U.S. than it is in most developing countries.
The Lorenz curve for the U.S. is further away from the diagonal line than the curve for most developed countries. This means that income is less equally distributed in the U.S. than it is in most developed countries.

How is the poverty line calculated? Is it an absolute or a relative measure of poverty?
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The U.S. definition of poverty is that a family is in poverty if it has an income equal to or less than three times an average family's minimum food expenditures. It is both an absolute and a relative measure of poverty. It is in part an absolute measure because the minimum food budget used in the definition was determined in the 1960s and food today is a much smaller portion of people's budgets. It is in part a relative measure because the specific dollar amounts are adjusted by the overall rate of inflation, which is greater tan the change in the prices of food.

What is a Lorenz curve? What does it mean if the gap between a Lorenz curve and the diagonal line gets smaller over time?
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What are the distributive consequences of the U.S. income taxes, the Social Security tax, sales taxes, and property taxes? (Are they progressive, proportional, or regressive?)
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Some critics complain that official U.S. poverty statistics overstate poverty because they do not consider the value of in-kind transfers. A large portion of the in-kind benefits for many poor families is made up of non-cash benefits such as food vouchers, housing subsidies and medical insurance. Should the value of these noncash benefits such as medical insurance be counted as an improvement in the economic well being of low-income families for purposes of calculating poverty statistics? Why or why not?
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Describe five major U. S. expenditure programs that are used to redistribute income
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One way to look at inequality is to look at the size distribution of income. What are two other approaches to measuring inequality? When measuring income distribution according to class, how does the class distribution in most developed countries compare to most developing countries? Recently, changes in the US class distribution of income by class have taken on what shape and why is this so?
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What is the Gini coefficient, and what is it used for? What would a Gini coefficient that was close to zero imply about inequality?
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Give three reasons why an equal distribution of income is not necessarily fair. Discuss each of them.
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How has income distribution changed in the U.S. since 1929? When did inequality decrease and when did it increase?
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What are the social costs of poverty?
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What is the difference between wealth and income? Which is a flow concept? Which is a stock concept?
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What does it mean if the gap between a Lorenz curve and the diagonal line gets smaller over time? Explain.
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Describe the difference between share distribution of income and socioeconomic distribution of income.
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In some countries the tax system is more progressive than in the U.S. What impact does this have on income inequality? What impact do you think this has on entrepreneurial activity?
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