Chapter 14R, Problem 3FRQ

a)

To determine

Lorenz curve for Nina

Explanation of Solution

As Nina has a coefficient of 0, which means the area between Lorenz curve and equality line is zero therefore, there is a perfect equal distribution of income in this case.

Perfect equal distribution of income at Gini coefficient of 0

  

b)

To determine

One point which lies on Pinta’s Lorenz curve

Explanation of Solution

As Pinta has Gini coefficient of 1 which means there is perfect inequality because only one person is earning all the income. Therefore, there is perfect unequal distribution of income.

Then, Lorenz curve of Pinta would be shown in graph as follows:

  

One point which lies on Pinta’s Lorenz curve is labeled as X.

c)

To determine

Whether Santa Maria should adopt progressive, regressive or proportional tax

Explanation of Solution

Santa Maria should choose progressive tax to move Lorenz curve closer to Nina because at Gini coefficient of 0.5, the area would below the perfect equality line. Here, it is needed to apply tax rates according to the level of income, if there is increase in income, then, tax would also increase.