Lorenz curve graphs the cumulative percentage of income against the cumulative percentage of households. For questions 1 to 3, please find the points on the curve that correspond to the specific group of households, for example, the richest 20 percent of household, then the difference between the vertical cumulative percentages of income is the percentage of total income that is received by that group. For question 4, if the income is equally distributed, it means the Lorenz curve overlaps the line of equality. This will be an extreme case of income distribution. It should be easy for you to figure out the answer because everyone is equally rich or poor. For question 5, you need to understand how inequality is measured using Lorenz curve. If the Lorenz curve is skewing away from the line of equality, it means the income distribution of the society is ??? For last question, Gini ratio is the ratio of the area between the line of equality and the Lorenz curve to the entire area beneath the line of equality. The areas needed for this calculation are given in the question.
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1. In the figure above, what percent of total income is received by the richest 20 percent of households?
2. In the figure above, what percent of total income is received by the poorest 40 percent of households?
3. In the figure above, what percent of total income is received by the second richest 20 percent of households?
4. In the figure above, if income were distributed equally across all households, the richest 20 percent of households would receive what percent of total income?
5. If a Lorenz curve for a country’s income bows more rightward over time, what is the implication in terms of income distribution?
6. If the area between the line of equality and the Lorenz curve A is 1,250, and the entire area beneath the line of equality is 5,000, what is the Gini ratio?
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