Test Questions with Answers
Chapter 18. Markets and the Government II.
Microeconomic Policy and Equity
Chapter 18 ― Question 1
When comparing Lorenz curves, how can you see at one glance in which of the countries income distribution is most unequal?
* The farther away the Lorenz curve is from the diagonal, the more unequal is income distribution.
Chapter 18 ― Question 2
How is the Gini coefficient calculated?
* It is calculated by the formula: area between the diagonal and the Lorenz curve divided by the entire area below the diagonal.
Chapter 18 ― Question 3
Below you find a chart with the distribution of money incomes among US households in 2005*. Please add the figures in the first and third columns.
| Income Class of Households | Percentage of All Households in This Class | Percentage of Total Income Received by Households in This Class | Cumulative Percentage of Incomes |
| Lowest fifth | 20% | 3.4 | 3.4 |
| Second fifth | 20% | 8.6 | 12.0 |
| Third fifth | 20% | 14.6 | 26.6 |
| Fourth fifth | 20% | 23.0 | 49.6 |
| Highest fifth | 20% | 50.4 | 100.0 |
| 100.0 |
Chapter 18 ― Question 4
Give six economics-related examples of government failure.
* Sending people into a war that is fought to pursue the economic interests of certain groups.
Telling lies about the relationship between economic phenomena, for instance, saying that environmental protection makes a country uncompetitive.
Corruption.
Stifling private initiative through over-regulation.
Making the tax system untransparent and biased.
Harming the interests of a country through oversized budget deficits that are financed by hostile foreign countries.
Chapter 18 ― Question 5
Economists say that equity costs efficiency. How do they explain that?
* Economic efficiency, that is, maximum GDP, can only be achieved if all people work as much as they can. Economists argue that a redistribution of incomes through taxation costs efficiency because taxes and welfare benefits cause disincentives. In other words, they think that the rich do not work enough because they do not have enough money left after taxation and that the poor do not work enough be cause they are given too much money.
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