2. Imagine an economy with only two people. Larry earns

$20,000 per year, while Roger earns $80,000 per year. As shown in the following figure, the Lorenz curve for this two-person economy consists of two line segments.

The first runs from the origin to point

a, while the second runs from point a to point

b. LO1

a. Calculate the Ginai tiro ofr this tow-person economy usingthegeometricf ormulasf orthear ea of a triangle ( 1/2 base height) and the area of a rectangle ( base height). (Hint: The area under the line segment from point a to point b can be thought of as the sum of the area of a particular triangle and the area of a particular rectangle.)

b. What would the Ginia trio be if the vgeornment taxed $20,000 away from Roger and gave it to Larry? (Hint: The figure will change.)

c. Start again with Larry earning $20,000 epare r y and Roger earning $80,000 per year. What would the Gini ratio be if both their incomes doubled?

How much has the Gini ratio changed from before the doubling in incomes to after the doubling in incomes?

Transcribed Image Text:

100 Percentage of income 80 80 60 60 40 20 Lorenz curve for Larry and Roger Perfect equality 0 20 b 40 60 80 100 Percentage of population