Question

Why do you suppose that choosing other increments besides \(15,000 or \)30,000 can yield even more distributional variations of households within these seven income groupings?

(Hint: what do you think could happen if one were to broaden the income increments to \(100,000 or narrow them to \)5,000 while holding the number of income groups equal to seven?)

Short answer

Larger income increments such as $100,000 would show that a higher percentage of people earn lower income. If income is shown in increments of $5,000, the income would appear to be more evenly distributed.

Step-by-step solution

Step 1. Introduction 

Income distribution shows how the total income or GDP of a nation is distributed among the population of the nation. Different measures such as the Lorenz curve, Gini coefficient, etc. can be used to show income distribution.

Income inequality is the representation of how unevenly the total income is distributed among the population

Step 2. Graph

Income distribution is shown by arranging the total population into different income groups from low earners to high earners. The percentage of the population in each income group shows how much income is being earned by what percentage of the population.

In panel (a), it is evident that if income distribution is shown in smaller groups such as in increments of $15,000, then income distribution appears to be more even. A higher percentage is shown to be earning high incomes.

In panel (b), it is visible that if income is shown in higher increments such as $30,000, then a major share of the population would appear to be in a lower earnings group.

Step 3. Explanation 

From the data given in the above tables, if income is shown in increments of $100,000 then 90 million people would be earning less than $100,000 and only 25 million or fewer would be earning more than $100,000. And as the income level goes higher, the number of people in each group would go on declining.

On the other hand, if the income is shown in smaller groups such as in increments of $5,000, then income distribution would appear to be more even.

Both the increments are extreme examples as they would lead to either very narrow distribution in the rest of the six income groups or very high distribution in rest of the income groups.