SOLUTIONS & DISCUSSION
PROBLEMS & EXERCISES
UNIT FOUR (FOR EXAM 4)
Unit Four: Assignment 3: Problem 3 page 787
1. They do not take into account in-kind benefits such as food stamps and tax credits.
2. They do not consider regional cost-of-living differences.
3. They do not take into account unreported income.
4. Food accounts for one-quarter of a family's budget, not one-third.
5. Ownership of assets such as homes, cars, and appliances is not taken into account.
b. Would making these changes be fair?
If aid-in-kind benefits such as food stamps and Medicaid were taken into account, then the incidence of poverty would be reduced.
Since there is no adjustment for cost-of-living differences, some regions have a poverty rate that is overstated while others have an understated rate.
If poverty is viewed as an absolute concept, then taking into account non-reported income would reduce the incidence of poverty. On the other hand, if poverty is viewed as relative, then the effect is less clear since unreported income occurs throughout all the various income levels: rich , poor, and those in-between.
Counting food as one-quarter instead of one-third of a household’s budget would make a difference. We can take an estimated food budget and multiply by four or take an estimated food budget and multiply by three. On a monthly basis, a $200 food budget multiplied by three would yield a poverty level of $600 per month. If multipled by four, the poverty level would be $800. The public assistance bill to the taxpayers would increase if food were counted as one-quarter instead of one-third.
Welfare and social services departments throughout the U.S. typically do take into account the ownership of assets for the purpose of determining eligibility for public assistance. An individual or family cannot own significant assets and establish eligibility for welfare. True, this is a somewhat different issue from the question presented, although it is related. Usually, income and assets will be consistent with each other: High income is associated with high assets and low income is associated with low assets. There are exceptions. A family with relatively high assets in relation to income may show up as "poor" in the official poverty statistics and yet may not really be poor.
When assets are considered, this is really a distribution of wealth issue. In the United States, wealth is distributed even more unequally than is income. Given this fact, then a consideration of assets could increase the number of households in relative poverty, though not necessarily absolute poverty. In America, a poor family might typically own a refrigerator, a television, etc. In many less wealthy nations, such a household would be considered rich!
You have now completed your microeconomics course and should be ready to take the final exam. Good luck on the final exam!
