Microeconomics 1st Edition by Dean Karlan,Jonathan Morduch

Exercise 2

Table 21P-2 shows the incomes of 10 households in two different years, 2020 and 2021. Assume that the government is considering two different measures of poverty, an absolute level of below

$10,000 and a relative measure of being in the bottom 40 percent of income earners.a. What is the poverty rate using the absolute measure of poverty in 2020? In 2021? Does it go up, down, or stay the same between the two years?
b. What is the poverty rate using the relative measure of poverty in 2020? In 2021? Does it go up, down, or stay the same between the two years?
c. Which yields a higher rate, the absolute measure of poverty or the relative measure of poverty in 2020? In 2021? d. Now assume that the government decides to index the poverty rate to inflation. Suppose inflation was 5 percent from 2020 to 2021. Now what is the poverty rate according to the absolute measure in 2021? Is it higher than the relative rate in 2021?