What does the Lorenz curve represent?

Question

What does the Lorenz curve represent?

1. A. Taxable income elasticity
2. B. Relationship between the price of a certain commodity and its demand
3. C. Income distribution (Correct answer)
4. D. Rate of employment

Correct Answer

Option C — Income distribution

Detailed Solution & Explanation

The correct answer is Income distribution.

Key Points

• The Lorenz Curve is a graphical representation of income (or wealth) distribution in a society.
• The further it bows from the line of equality, the greater the inequality (measured by the Gini coefficient).

Additional Information

• The Lorenz curve plots the cumulative share of income against the cumulative share of population; the 45° line represents perfect equality.
• The further the curve bows away from that line, the greater the inequality.
• The Gini coefficient is twice the area between the curve and the line of equality, running from 0 (perfect equality) to 1 (perfect inequality).
• It was devised by Max Lorenz in 1905; the Gini coefficient is due to Corrado Gini. Both are used for wealth and land holdings as well as income.