Question

Suppose that a society contains only two members, a lawyer named Monique and a handyman named James. Five years ago, Monique made \(\$ 100,000\) while James made \(\$ 50,000\). This year, Monique will make \(\$ 300,000\) while James will make \(\$ 100,000 .\) Which of the following statements about this society's income distribution are true? Select one or more answers from the choices shown. a. In absolute dollar amounts, the entire distribution of income has been moving upward. b. In absolute dollar amounts, the entire distribution of income has been stagnant. c. The relative distribution of income has become more equal. d. The relative distribution of income has become less equal. e. The relative distribution of income has remained constant. f. The rich are getting richer while the poor are getting poorer. g. The rich are getting richer faster than the poor are

Short answer

a and d are true: the income distribution in absolute terms has increased, but it has become less equal in relative terms.

Step-by-step solution

Understand the Income Changes

Review the income changes over the five years for Monique and James. Monique's income increased from $100,000 to $300,000. James' income increased from $50,000 to $100,000.

Analyze Absolute Income Changes

Calculate the increase in income for both individuals. Monique's income increased by $200,000 (from $100,000 to $300,000), and James' income increased by $50,000 (from $50,000 to $100,000). This shows that in absolute dollar amounts, both members have moved upwards.

Examine Relative Income Changes

Calculate the percentage increase in income for both individuals. Monique's income tripled (200% increase), while James' income doubled (100% increase). This implies that the relative distribution of income between them has not become more equal.

Determine Distribution Equality

With Monique's income increasing at a greater percentage, the income distribution in terms of relativity has become less equal. Monique's share of the total income has increased more than James'. Thus, relative inequality has increased.

Key concepts

Absolute Income Changes

When we talk about absolute income changes, we're looking at the raw dollar increase in earnings without considering the income structure over the years. Absolute changes help us understand how much more money individuals have gained, regardless of their starting points.

In this exercise, Monique saw an income jump from $100,000 to $300,000, marking an absolute increase of $200,000. James, on the other hand, moved from $50,000 to $100,000, an increase of $50,000. Both individuals have experienced upward movements in their income, evidence of absolute income change.

Here are key points to remember about absolute income changes:

• This change is calculated in straightforward dollar amounts.
• Monique has seen a larger absolute increase than James.
• Absolute income change does not involve percentages or ratios. It’s strictly about the additional dollars each person earns.

This context helps visualize the financial progression of each individual, reflecting their monetary growth without any comparative context.

Relative Income Changes

Relative income changes take into account the proportional or percentage changes in income, putting perspective on how incomes grow in relation to each other. This type of analysis reveals shifts in income equity and contributes to understanding the broader picture of economic distribution.

For Monique, her income tripled, indicating a 200% increase. For James, his income doubled, reflecting a 100% increase. Even though both individuals have improved their financial standing, these figures highlight that Monique's income growth outpaced James'.

Consider these facts about relative income changes:

• Focuses on percentage growth rather than dollar growth.
• Helps understand not just how much, but the rate at which incomes rise relative to one another.
• The wider the gap in percentage increases, the more likely income inequality increases.

By analyzing these percentage increases, it is clear that Monique's financial growth is significantly higher in relation to James', prompting some inequality concerns.

Income Inequality

Income inequality examines how evenly income is distributed within a society. When there's a growing gap in income proportions among individuals, it's a sign of increasing inequality. The case of Monique and James illustrates this well.

Initially, Monique made twice as much as James. However, with the new income adjustments, Monique's earnings are now three times those of James, illustrating a shift toward greater disparity.

Understanding income inequality involves these insights:

• Measured by how income is distributed rather than just the amount of income.
• Increased percentage gains by the wealthier person suggest increasing inequality.
• Monique's share of the total income has grown compared to James, signaling a widening gap.

This scenario underscores that even though both members of society have seen income increases, the larger gains by wealthier individuals can exacerbate economic imbalances.