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Worked Problems
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1
Suppose society consists of 5 households whose incomes are $8,000, $12,000, $20,000, $40,000, and $80,000.
  1. What is the total income in this society?
  2. What percentage of total income is earned by the poorest quintile?
  3. What percentage of total income is earned by the richest quintile?
  4. What percentages of total income are received by the second, third, and fourth quintiles?
  5. Construct a Lorenz curve for this five-household economy.

2
Consider the three hypothetical public assistance plans:
Plan 1
Earned IncomeTransfer PaymentTotal Income
$ 0$ 6,000$ 6,000
$ 4,000$ 4,000$ 8,000
$ 8,000$ 2,000$ 10,000

Plan 2
Earned IncomeTransfer PaymentTotal Income
$ 0$ 8,000$ 8,000
$ 4,000$ 6,000$ 10,000
$ 8,000$ 4,000$ 12,000

Plan 3
Earned IncomeTransfer PaymentTotal Income
$ 0$ 6,000$ 6,000
$ 4,000$ 5,000$ 9,000
$ 8,000$ 4,000$ 12,000

  1. What is the minimum monthly income for each plan?
  2. What is the benefit-reduction amount for each plan?
  3. What is the break-even income for each plan?
  4. Which plan has the strongest incentive to work? Which the weakest?






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