Consider the Following Distribution of Income in a 12-Person Economy

question 40

Essay

Consider the following distribution of income in a 12-person economy, with the modern urban ?wage ₌ 10, the traditional rural income ₌ 2, and the informal urban wage ₌ 4: (2, 2, 2, 2, 4, 4, 4, 4, 10, 10, 10, 10).
a.Suppose rural incomes are raised to 3, other things equal. Show the change using the Lorenz curve. How would this type of growth be characterized? (It is suggested that you use the Fields growth decomposition in answering. This shows traditional sector enrichment growth.) b.Calculate the Ahluwalia-Chenery Welfare Index for terciles (3 fractiles) under GNP weights and equal weights. Which index is higher and why?

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Definitions:

Risk-Free Rate

The theoretical rate of return of an investment with no risk of financial loss.

Beta

A measure of a stock's volatility in relation to the overall market; a beta above 1 indicates that the stock's price tends to be more volatile than the market.

Cost of Equity

The yield a company needs to determine whether an investment satisfies its capital return criteria.

Risk-Free Rate

The expected return on an investment that carries no risk, often shown through the yield of government bonds.