© 2013 Pearson
Economic Inequality
20
CHECKPOINTS
© 2013 Pearson
Click on the button to go to the problem
Checkpoint 20.1
Checkpoint 20.2
Checkpoint 20.3
Problem 1
Problem 1
Clicker
version
Problem 1
Problem 2
Problem 2
Clicker
version
Problem 2
In the news
Problem 3
In the news
© 2013 Pearson
In the news
CHECKPOINT 20.1
Practice Problem 1
The table shows the
distribution of income in
Canada.
Create a table that shows
the cumulative percentages
of households and income in
Canada.
© 2013 Pearson
CHECKPOINT 20.1
Solution
Table 2 shows the cumulative percentages of households
and income.
© 2013 Pearson
CHECKPOINT 20.1
Practice Problem 2
Table 1 shows the distribution of
income in Canada and
The table below shows the distribution
of income in the United States.
Draw the Lorenz curves for Canada
and the United States. Compare the
distribution of income in Canada with
that in the United States. Which
distribution is more unequal?
© 2013 Pearson
CHECKPOINT 20.1
Solution
A Lorenz curve plots the
cumulative percentage of
income against the
cumulative percentage of
households.
The blue curve plots the
data for the Canadian
Lorenz curve.
The green curve plots the
data for the U.S. Lorenz
curve.
© 2013 Pearson
CHECKPOINT 20.1
The line of equality shows an
equal distribution.
The Canadian Lorenz curve
lies closer to the line of
equality than the U.S. Lorenz
curve, so the distribution of
income in the United States
is more unequal than that in
Canada.
© 2013 Pearson
CHECKPOINT 20.1
In the news
Minorities hit harder by economic issues
Plummeting home values, as well as home foreclosures,
have had a big impact on the distribution of wealth
because blacks and Hispanics have a much higher share
of their wealth tied up in the value of their homes.
Hispanics experienced the biggest loss of wealth because
many bought homes in states where the real estate market
had the steepest plunge in value.
Source: USA Today, September 14, 2007
Explain how the events in the new clip changed the
distribution of wealth. Which quintiles would experience an
increase in their share of wealth?
© 2013 Pearson
CHECKPOINT 20.1
Solution
A household’s wealth is the value of the things it owns at
a point in time. It is measured as the market value of a
household’s home, the stocks and bonds that it owns, and
the money in its bank accounts minus its debts.
Because most of the wealth of blacks and Hispanics is
made up of their houses, as house prices fell and home
foreclosures increased, the percentage of total wealth of
the lowest quintiles fell and the percentage of total wealth
held by wealthier quintiles increased. The distribution of
wealth became more unequal.
© 2013 Pearson
CHECKPOINT 20.2
Practice Problem 1
In the United States in 2010, 30 million people had fulltime managerial and professional jobs that paid an
average of $1,200 a week.
At the same time, 10 million people had full-time sales
positions that paid an average of $600 a week.
Explain why managers and professionals are paid more
than salespeople.
© 2013 Pearson
CHECKPOINT 20.2
Solution
A typical manager or
professional has incurred a
higher cost of education
and on-the-job training than
the typical salesperson has.
The supply curve of
managers and
professionals, SH, lies above
that of salespeople, SL.
© 2013 Pearson
CHECKPOINT 20.2
The better education and
more on-the-job training
result in managers and
professionals having more
human capital and a higher
value of marginal product
than that of a salesperson.
The demand curve for
managers and
professionals, DH, is greater
than the demand for
salespeople, DL.
© 2013 Pearson
CHECKPOINT 20.2
The figure shows that the
combination of demand and
supply leads to a higher wage
rate for managers and
professionals than for
salespeople.
© 2013 Pearson
CHECKPOINT 20.2
Study Plan Problem
In 2010, 30 million professionals were paid an
average of $1,200 a week and 10 million salespeople
were paid an average of $530 a week. Professionals
are paid more than salespeople because ______.
A. Professionals have a higher value of marginal product
B. Both the supply of professionals and the demand for
professionals are greater than for salespeople
C. Professionals have more human capital
D. Professionals incur a higher cost of education
E. All of the above.
© 2013 Pearson
CHECKPOINT 20.2
Practice Problem 2
In the United States in 2010, 30 million people had fulltime managerial and professional jobs that paid an
average of $1,200 a week.
At the same time, 10 million people had full-time sales
positions that paid an average of $600 a week.
Explain why, despite the higher weekly wage rate, more
people are employed as managers and professionals than
as salespeople.
© 2013 Pearson
CHECKPOINT 20.2
Solution
The figure shows that the
combination of greater demand
and greater supply leads to
greater employment for
managers and professionals
than for salespeople.
© 2013 Pearson
CHECKPOINT 20.2
Practice Problem 3
In the United States in 2010, 30 million people had fulltime managerial and professional jobs that paid an
average of $1,200 a week.
At the same time, 10 million people had full-time sales
positions that paid an average of $600 a week.
Shopping online has become popular and more and more
firms offer their goods and services for sale online.
If this trend continues, how do you think the market for
salespeople will change in coming years?
© 2013 Pearson
CHECKPOINT 20.2
Solution
As shopping online continues to grow, firms will hire fewer
salespeople.
The demand for salespeople will decrease, and fewer
people will work in sales.
What will happen to their wage rate will depend on how
the supply of salespeople changes.
© 2013 Pearson
CHECKPOINT 20.2
Study Plan Problem
In 2010, 30 million professionals were paid an average
of $1,200 a week and 10 million salespeople were paid
an average of $600 a week. Shopping online has
become popular. If this trend continues, the ______
salespeople will ____ and the wage rate will ___.
A.
B.
C.
D.
demand for; decrease; definitely fall
demand for; decrease; might rise or fall
supply of and demand for; decrease; definitely rise
demand; decrease; will remain relatively unchanged
© 2013 Pearson
CHECKPOINT 20.2
In the news
Trade schools boom with enrollees of all ages
Disappearing jobs have helped drive thousands of people
to state-run trade schools, where they can receive training
on anything from truck driving to medical billing. Patricia
Parker, 58, said, “I'm tired of getting laid off at factories. I
need to re-educate myself.” She expects to have finished
coursework in business system technology and get a job
at a medical office. Some students are retraining as auto
mechanics, a skill that won’t be outsourced.
Source: USA Today, July 19, 2009
Why might people who previously worked in factories be
going to trade school?
© 2013 Pearson
CHECKPOINT 20.2
Solution
Factory jobs are disappearing as factories (such as those
making furniture and textiles) close or jobs are
outsourced.
Patricia Parker is acquiring a skill which she believes will
not be outsourced and one that she might be able to use
in many different jobs.
Other students think that a mechanic’s skill might serve
them well in the future.
© 2013 Pearson
CHECKPOINT 20.3
Practice Problem 1
Table 1 shows the distribution of market income. Table 2
shows the redistribution of income through income taxes
and benefits. Calculate the income shares of each 20
percent of households after tax and redistribution.
© 2013 Pearson
CHECKPOINT 20.3
Solution
To find the distribution of income, multiply the market
incomes by the tax rates, subtract the taxes paid, and add
the benefits received to obtain the income after tax and
benefits. The table shows the calculations.
© 2013 Pearson
CHECKPOINT 20.3
Practice Problem 2
Table 1 shows the distribution of market income. Table 2
shows the redistribution through income taxes and
benefits.
Draw the Lorenz curve before and after redistribution.
© 2013 Pearson
CHECKPOINT 20.3
Solution
To draw the Lorenz curves,
calculate the cumulative
shares.
For example, before taxes
and benefits, the lowest 20
percent have 5 percent of
total income and the lowest
40 percent have 15 percent
(5 + 10) of total income.
© 2013 Pearson
CHECKPOINT 20.3
After taxes and benefits, the lowest 20 percent have
16 percent of total income and the lowest 40 percent
have 34.1 percent (16 +18.1) of total income.
© 2013 Pearson
CHECKPOINT 20.3
The figure shows the Lorenz
curves before taxes and
benefits (green curve) and the
Lorenz curve after taxes and
benefits (blue curve).
© 2013 Pearson
CHECKPOINT 20.3
In the news
The 0% tax rate solution
In 2006, the bottom 40 percent of income earners received
net payments equal to 3.6% of total income tax revenues.
The middle 20 percent of income earners pay 4.4% of total
income tax revenues. That means the bottom 60 percent
together pay less than 1% of income tax revenues.
Source: The Wall Street Journal, July 14, 2009
Would a policy that taxed the bottom 60 percent of income
earners at a 0% tax rate and reduced redistribution by 1
percent of tax revenue have any merit?
© 2013 Pearson
CHECKPOINT 20.3
Solution
The redistribution process uses resources.
A dollar taken from a high income earner does not
translate into a dollar for a low-income earner.
Reducing the necessity of 60 percent of workers to file
income tax will save resources.
There would be a net social gain, which might be used to
help the poor.
© 2013 Pearson