Which of the Following Lorenz Curves Is Closest to the Diagonal

question 16

Multiple Choice

Which of the following Lorenz curves is closest to the diagonal line?

• A) The before-tax, before-transfer income distribution
• B) The after-tax income distribution
• C) The after-transfer income distribution
• D) The before-tax distribution of income

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Definitions:

Operating Leverage

Operating leverage refers to the degree to which a company or project can increase operating income by increasing revenue.

Total Leverage

The combination of operating leverage (affecting operating income) and financial leverage (affecting net income), indicating total risk.

Financial Leverage

The use of borrowed funds to finance the acquisition of assets, with the expectation that the profits made will be greater than the interest payable.

Net Income

The total profit of a company after all expenses and taxes have been subtracted from revenues.