1.Assume we are in the year 2004, and you are hired by the president of South Africa to design a policy to reduce the poverty headcount Index as much as possible. In order to simplify your calculations, assume that if the income of a household is exactly equal to the poverty line Z=325, the household is not poor. In order to implement the policy, the president imposes a tax of 10% on the income of all households earning 1,705 Rand per capita or more.
A.a. How much money does the South African government collect in tax revenues in 2004? (show your calculation steps)
B.Describe – in words- your policy (how would you allocate the tax revenues to poor households to achieve the goal of minimizing the poverty headcount index?) Hint: Under this policy, you should not give a transfer to any household unless that transfer changes their poverty status. You may end up with a few dollars left (the total amount transferred can be less than the total amount collected in taxes)
No more than 125 words.
C.Recompute the Poverty Head Count Index, the Poverty Gap Index, and the FGT-2 index after your tax and transfer policy is implemented. (show your calculation steps)
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