Econ 115: Tutorial #11
Simon Fraser University
Joshua F. Boitnott, PhD
1. Suppose there are 10 people in the economy with two possible distributions shown, one
before taxes and transfer while the other is after taxes and trasnfers shown below:
Distribution:
1
2
3
4
5 6 7 8 9
Before Tax/Transfer $0.5 $0.5 $0.5 $0.5 $2 $2 $2 $6 $6
After Tax/Transfer
$2
$2
$2
$2 $3 $3 $3 $5 $5
10
$20
$13
(a) Based on the information given, what is the size of the economy? What is the
average income per capita? What is the median income before and after taxes?
(b) Use the information about the distributions to create 2 Lorenz Curves. Make sure
to label you diagrams clearly.
(c) Calculate the Gini Coefficient for each outcome.
1
Reminder : Area of a Triangle is ×Base×Height and Area of a Trapezoid is
2
1
×(Height1 +Height2 )×Base. (Note: Posted chapter used Trapezoid formula,
2
but called it a Rhombus. Any Trapezoid could be calculated as a Rectangle and
a Triangle.)
(d) How does the taxes and transfer system adjust the inequality in the economy?
What is the Palma ratio for each distribution?
(e) Unfortunately redistribution is not cost-less. Instead suppose the distribution is:
1
2
3
4
5
6
7
8
9
10
$1.5 $1.5 $1.5 $1.5 $2.75 $2.75 $2.75 $5.25 $5.25 $12.75
What has happened to the average income? What about the median income?
How has this adjusted the Palma ratio?
(f) Why might the government want to redistribute income even if it is not cost-less
(i.e. even if there is an inefficiency)?