Microecon question 2?

Question

The table below summarizes the income distribution for the town of Perkopia, which has a population of 10,000. Assume that every individual within each fifth of the income distribution earns the same amount of income, and suppose that the total annual income in the economy is $500 million, which excludes any government transfer payments.

Share of Total Annual Income in Perkopia
Year BottomFifth SecondFifth MiddleFifth FourthFifth TopFifth
(Percent) (Percent) (Percent) (Percent) (Percent)
1987 4.1 10.1 16.6 24.7 44.5
1993 3.8 9.6 15.5 24.9 46.2
1998 3.7 8.8 15.8 24.9 46.8
2003 3.5 7.2 15.1 25.2 49.0

Suppose that in 1987 the poverty line is set at an annual income of $26,000 for an individual. What is the poverty rate in Perkopia in 1987?


A. 40%

B. 50%

C. 20%

D. 60%

Answer 1

A. 40%

10,000 people divided by 5 equal groups is 2,000 per group.

The second fifth income is:

$500,000,000 x 10.1% / 2000 = $25,250 each

So the second fifth is just below the poverty line, and you add the bottom fifth as they make even less. So 2/5 = 40%