Question 1
Suppose that the Lorenz Curve of a country is constructed based on the following function:
f (x) = (1/2).x, if 0≤x≤0.5
f (x) = 0.25 + 1.5.(x-0.5), if 0.5≤x≤1
a) Just by looking into this function, what intuition about this country income distribution can one
get?
b) Draw the Lorenz Curve and find the Gini Coefficient (Gc).
Question 2
Suppose that the bottom 50% of the population split equally one-fourth of the total income of a
country. Also, assume that the remaining three-fourths of the total income are equally distributed
between the top 50% of the population. Given that information, calculate the Gini Coefficient of this
country.
<Q3-Q4> The distribution of population in Country A is assumed to be as follows.
Question 3
Draw the Lorenz curve for Country A.
Question 4
Calculate the Gini coefficient for Country A.
Question 5
Explain the difference between import tariff and import quota?
Question 6
List some benefits of free trade.
Question 7
List some reasons for restricting trade.
Question 8
Suppose the following social structure:
There are three classes (within each social class, income is equally distributed) and their
population share and total income share are as follows:
Population share
50%
40%
10%
Poor
Middle
Rich
Income share
10%
40%
50%
Calculate Gini coefficient of this society.
Question 9
Following question 1, if the government imposes a 20% income tax on rich people and then
redistributes the revenue the poor people, what happens to Gini coefficient then?
Answer:
1.
A) Just by looking at the function one can notice that half of the population gets an amount of
income that is less than proportional to the mass of population they do represent in this country
(inclination ½ < 1, where the inclination of 1 shows an egalitarian society), while the other half
gets a share of income that is more than proportional to what they do represent as population
(inclination 1.5 > 1).
B)
2.
Gini Coefficient is equal to .25 (notice that this exercise is exactly the same as the previous one,
but without using the function to define the Lorenz Curve, this should give you some
mathematical intuition about the function given before).
3.
4.
5.
An import tariff is a tax levied by a domestic country on an imported good.
An import quota limits the quantity of a good that can imported.
They both increase the price of the imported good above the world price (price under free trade).
In addition, we know imposition of an import tariff raises the price of an imported good above
the world price by the amount of the tariff.
6.
Free trade
1.
2.
3.
4.
5.
increases the total surplus enjoyed in the domestic market
increasing the variety of goods available in the domestic market
lowering costs by allowing firms to take advantage of economies of scale in production
increasing competition (which can spur efficiency and innovation)
facilitating the flow of ideas and knowledge between countries
7.
People advocate restricting trade for a range of reasons including
1. protecting domestic jobs
2. protecting domestic industries from �unfair� foreign competition
3. maintaining national security
4. nurturing infant industries
The next 2 answers (1 and 2, respectively) go for questions 8 and 9.