EC303

- Problem Set 3

Exercise 1

Revise the main definitions and key properties of the Pareto distributions

a) What is the formula for the probability density function (pdf)? And the one for
the cumulative distribution function (cdf)?

b) What does it mean to have a higher Pareto coefficient a?

Exercise 2

The main goal of this exercise is to show that the Pareto coefficient a can be obtained
from micro-founded models with multiplicative random shocks and that a higher r-g
means more inequality.

a) Go to section 5.4.1 of Piketty, T. and G. Zucman (2014). "Wealth and Inheritance in
the Long Run" in in the Handbook of Income Distribution, where an illustrative example
of the r-g model of wealth concentration is presented. By following the steps detailed in
this section proceed with a step-by-step derivation of the multiplicative random shocks
model up to equation (4) on page 45.