Principles of Microeconomics, 11e -TB1 (Case/Fair/Oster)
Chapter 18 Income Distribution and Poverty
18.1 The Sources of Household Income
1) Both Amy and Tom are trained as nurses. Amy makes $35,000 a year working as a
nurse in an emergency room in a New York City hospital. Tom makes $20,000 working
as a community health nurse in New York City. Which of the following is true?
A) Tom is clearly worse off than Amy, because he earns $15,000 a year less.
B) Tom must be better off than Amy if he is willing to take a job at $15,000 a year less
than Amy.
C) From this information it cannot be determined who is better off because income is an
imperfect measure of well-being.
D) Even though income is an imperfect measure of well-being, Amy and Tom must be
equally well off because either is free to switch jobs.
Answer: C
Diff: 2
Topic: The Sources of Household Income
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-25
3) Households derive the majority of their income from ________.
A) wages and salaries
B) property
C) inherited wealth
D) government transfers
Answer: A
Diff: 1
Topic: The Sources of Household Income
Skill: Fact
Learning Outcome: Micro-25
5) Earning a master's degree in Engineering is an example of ________.
A) a Pareto good
B) a compensating differential
C) economic income
D) an investment in human capital
Answer: D
Diff: 2
Topic: The Sources of Household Income
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-17
6) On-the-job-training is an example of ________.
A) an investment in human capital
B) a compensating wage differential
C) economic income
D) income redistribution
Answer: A
Diff: 2
Topic: The Sources of Household Income
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-17
7) Households acquire property through ________.
A) inheritance only
B) savings and inheritance
C) savings only
D) supplying labor in the labor market
Answer: B
Diff: 1
Topic: The Sources of Household Income
Skill: Fact
Learning Outcome: Micro-25
8) Property income takes the form of ________.
A) transfer payments
B) wages and salaries
C) profits, interest, dividends, and rents
D) compensating differentials
Answer: C
Diff: 1
Topic: The Sources of Household Income
Skill: Definition
Learning Outcome: Micro-25
9) Professional female basketball players make far less income than do professional male
basketball players. Why?
A) gender discrimination
B) The supply of female players is far greater than the supply of male players.
C) The demand for female players is far less than the demand for male players.
D) compensating differentials
Answer: C
Diff: 2
Topic: The Sources of Household Income
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-25
10) Upon graduation, Ellie had two job offers. The jobs were identical in every way with
two exceptions. One job was located in San Diego, CA and offered an annual salary of
$50,000. The other job was located in Omaha, NE and offered an annual salary of
$60,000. The salary difference is due to
A) compensating differentials.
B) discrimination.
C) transfer payments.
D) the firm in California had a higher demand for workers than the firm in Nebraska.
Answer: A
Diff: 2
Topic: The Sources of Household Income
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-25
12) In the summer of 2009, the United States federal minimum wage was raised to $7.25.
According to theory, what will likely be the result of the increase?
A) Some workers will leave the labor market.
B) Firms will hire more workers.
C) All workers prior to the wage increase will now earn at least $7.25 per hour.
D) Unemployment will increase as firms lay off workers.
Answer: D
Diff: 2
Topic: The Sources of Household Income
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-17
14) All Pittsburgh police officers must go through the same training program, but police
officers assigned to the narcotics squad earn 10% more than police officers assigned to
guard the city courthouse. This 10% difference in pay is an example of a
A) human capital differential.
B) compensating differential.
C) transfer payment.
D) utility differential.
Answer: B
Diff: 2
Topic: The Sources of Household Income
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-25
17) The idea that individuals who work for companies should receive at least an equitable
hourly income is known as
A) minimum wage.
B) compensating differential.
C) economic income.
D) transfer payment.
Answer: A
Diff: 2
Topic: The Sources of Household Income
Skill: Definition
Learning Outcome: Micro-25
18) Critics of minimum wage laws argue that such laws will end up hurting people with
lower skills because
A) lower skilled workers will be forced into taking jobs that they would not freely
choose.
B) compensating differentials will not be applied.
C) property income is a better way to measure hourly rates.
D) these laws interfere with the smooth functioning of the labor market and create
unemployment.
Answer: D
Diff: 2
Topic: The Sources of Household Income
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-25
18.2 The Distribution of Income
1) Economic income is
A) the amount of money a household can spend during a given time period without
increasing or decreasing its net worth.
B) income from the ownership of real property and financial holdings.
C) differences in wages that result from differences in working conditions.
D) payments by government to people who do not currently supply goods or services in
exchange.
Answer: A
Diff: 2
Topic: The Distribution of Income
Skill: Definition
Learning Outcome: Micro-1
2) The amount of money a household can spend during a given time period without
increasing or decreasing its net worth is called ________ income.
A) economic
B) money
C) after-tax
D) property
Answer: A
Diff: 2
Topic: The Distribution of Income
Skill: Definition
Learning Outcome: Micro-25
9) As income becomes more unequally distributed, the Lorenz curve ________ and
________.
A) moves further down to the right; the shaded area increases
B) moves further up to the left; the shaded area decreases
C) moves further up to the left, rising above the 45 degree line; the shaded area increases
D) moves further down to the right; the shaded area decreases
Answer: A
Diff: 2
Topic: The Distribution of Income
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-25
Refer to the information provided in Figure 18.4 below to answer the questions that
follow.
Figure 18.4
10) Refer to Figure 18.4. The wealthiest fifth of families earned ________% of income in
Outland.
A) 20
B) 40
C) 60
D) 95
Answer: B
Diff: 3
Topic: The Distribution of Income
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-25
11) Refer to Figure 18.4. The second poorest fifth of families earned ________% of
income in Outland.
A) 5
B) 7
C) 12
D) 17
Answer: B
Diff: 3
Topic: The Distribution of Income
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-25
12) Refer to Figure 18.4. Suppose that the Lorenz curve were the same as the 45-degree
line OB. This would mean that
A) the distribution of income is perfectly equitable.
B) the distribution of income is completely inequitable.
C) only one family earned all the income.
D) the distribution of income is equal.
Answer: D
Diff: 3
Topic: The Distribution of Income
Skill: Conceptual
AACSB: Analytic Skills
Learning Outcome: Micro-25
13) Refer to Figure 18.4. Suppose that the Lorenz curve ran along the horizontal axis to
100% of families, then became vertical to 100% of income. This would mean that
A) the distribution of income is perfectly equitable.
B) the distribution of income is completely inequitable.
C) only one family earned all the income.
D) the distribution of income is equal.
Answer: C
Diff: 3
Topic: The Distribution of Income
Skill: Conceptual
AACSB: Analytic Skills
Learning Outcome: Micro-25
14) The Gini coefficient is ________.
A) the most common way of representing the income distribution graphically
B) a commonly used measure of the degree of inequality in an income distribution
C) a commonly used measure of the degree of inequity in a property distribution
D) the ratio of the percentage of total income received by the top 20% of families to the
percentage of total income received by the bottom 20% of families
Answer: B
Diff: 2
Topic: The Distribution of Income
Skill: Definition
Learning Outcome: Micro-25
15) A Gini coefficient of zero means that ________.
A) the income is equally distributed
B) one person has all the income and everyone else has nothing
C) all the income is received by the top 20% of families
D) the income is split equally between the top 20% and the rest of the distribution
Answer: A
Diff: 2
Topic: The Distribution of Income
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-25
16) A Gini coefficient of one means that ________.
A) income is distributed equally
B) one family has all the income and everyone else has nothing
C) all the income is received by the top 20% of families
D) the income is split equally between the top 20% and the rest of the distribution
Answer: B
Diff: 2
Topic: The Distribution of Income
Skill: Conceptual
AACSB: Reflective Thinking
9) You and your brother are splitting a piece of cake. You cut it into two pieces and your
brother selects his piece first. Thus, you cut it into two equally sized pieces. This is an
example of ________.
A) utilitarian justice
B) Rawlsian justice
C) communism
D) a public good
Answer: B
Diff: 2
Topic: The Redistribution Debate
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-1
10) The idea that a dollar in the hand of a rich person is worth less than a dollar in the
hand of a poor person is a consequence of ________ justice.
A) utilitarian
B) social
C) Rawlsian
D) absolute
Answer: A
Diff: 2
Topic: The Redistribution Debate
Skill: Definition
Learning Outcome: Micro-25
11) According to utilitarian justice, the redistribution of income from the rich to the poor
causes
A) the rich to sacrifice a lot and the poor to gain a little.
B) the marginal utility of both the rich and the poor to increase.
C) the marginal utility of both the rich and the poor to decrease.
D) an increase in total utility because of the law of decreasing marginal utility.
Answer: D
Diff: 2
Topic: The Redistribution Debate
Skill: Definition
Learning Outcome: Micro-25
12) If the marginal utility of income decreases as income increases, transferring income
from the rich to the poor will
A) increase total utility.
B) decrease total utility.
C) not change total utility.
D) increase marginal utility, but not change total utility.
Answer: A
Diff: 3
Topic: The Redistribution Debate
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-25
13) The notion of utilitarian justice is that
A) through income redistribution, the rich sacrifice a little and the poor gain a lot.
B) any change that makes some people better off without making anyone worse off
should be undertaken.
C) income should be distributed so that the well-being of the worse-off member of
society should be maximized.
D) income should be distributed according to an individual's needs.
Answer: A