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

question 6

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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