A Level Economics AQA Practice Exam

Why is the Lorenz Curve important in economics?

1. It helps in predicting future income levels

2. It signifies consumer behavior in the market

3. It illustrates the degree of income inequality

4. It assesses the inflation trends

The correct answer is: It illustrates the degree of income inequality

The Lorenz Curve is important in economics because it visually represents the distribution of income or wealth within a society, illustrating the degree of income inequality. It plots the cumulative percentage of total income received against the cumulative percentage of the population, allowing for a clear understanding of how income is distributed among different segments of the population. When the curve is further from the line of equality (which represents perfect equality where everyone has the same income), it indicates a higher level of income inequality. This insight is crucial for policymakers and economists as it helps them analyze the effectiveness of income distribution policies, assess social welfare, and identify areas that may require intervention to achieve more equitable income distribution. Options suggesting utility in predicting future income levels or assessing inflation trends do not align with the primary function of the Lorenz Curve, which focuses solely on representing existing income distribution patterns rather than forecasting economic variables. Similarly, while consumer behavior is an important area of study in economics, it is not the purpose of the Lorenz Curve to capture such behavior, making its application to that topic less relevant.