Multiple Choice
Which of the following would represent the Lorenz curve of an nation where everyone earned equal income?
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16. Income Inequality and Poverty
Lorenz Curve and Gini Coefficient
Multiple Choice
Based on the information in the Lorenz curve above, which of the following is true?
A
The Lorenz curve always lies above the line of equality.
B
A Lorenz curve that is farther from the line of equality indicates a lower level of income inequality.
C
The Lorenz curve and the line of equality are identical in all economies.
D
A Lorenz curve that is closer to the line of equality indicates a lower level of income inequality.
Verified step by step guidance1
Understand the Lorenz curve: It is a graphical representation of income or wealth distribution within an economy. The curve plots the cumulative percentage of total income received against the cumulative percentage of recipients, starting with the poorest.
Recognize the line of equality: This is a 45-degree line from the origin to the top right corner, representing perfect equality where each percentage of the population earns the same percentage of total income.
Interpret the position of the Lorenz curve relative to the line of equality: The farther the Lorenz curve lies below the line of equality, the greater the income inequality, because a smaller share of the population holds a larger share of income.
Analyze the statements given: The Lorenz curve never lies above the line of equality because that would imply a group earning more than their population share, which is impossible. Also, the Lorenz curve and the line of equality are identical only in the case of perfect equality.
Conclude that a Lorenz curve closer to the line of equality indicates a lower level of income inequality, as income distribution is more even across the population.
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