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26.12.2020 Yasar University Faculty of Business Department of Economics ECON 3399 Public Economics Midterm Exam II Due Date: December 31st, 2020 (30 pts) Assume that there is a society with three individuals (Marie, Pablo and Stefanie) trying to decide how much money to spend on library. There are three options for spending: L (Low), M (Medium) and H (High). These three individuals rank these three options as follows: Rank Marie Pablo Stefanie 1 M L H 2 L M M 3 H H L Could majority voting be applied to make a decision on how much to spend on library? Explain. Plot the preference mapping of each individual and propose an alternative voting mechanism. Did the mechanism that you proposed lead to a stable outcome on spending on library. Would giving one person the ability to set the agenda affect the outcome? Explain. Now suppose Stefanie’s preference ordering changed to this order: First choice=L, second choice=H and third choice=M. Would your proposed rule in (b) lead to a stable outcome. Explain with the reasons. Explain the Median Voter Theorem and how one may use the Median Voter Theorem to derive a result (Not just Theorem, also apply to the question!)? (25 pts) The boy who goes to university has $180 income with which he can buy textbook and other stationery goods. The market price for book is $6 and the price of all other goods is $2 per unit. a) Draw the budget line (Show all your computation on the graph). b) For the initial condition, the boy buys 60 units of other stationery goods and 10 books. Comment on the situation in which government program providing free 30 books (Draw the budget line again and compare the utility after government gives free 30 books). c) Under another in which government would provide $180 instead of providing book. Show that the boy would prefer cash to in kind transfer. (10 pts) Suppose that there are two people Sandy and Jeff sharing a fixed income of $250. For Sandy and Jeff total utility of income is TU(IS)=300IS-3 and TU(IJ)=300IJ-, respectively. First initial income is distributed equally between Sandy and Jeff. What is the optimal distribution of income in order to maximize society’s welfare? (15 pts) Explain logrolling with your own words. Also determine whether logrolling can improve efficiency or not with respect to utility levels for three projects (Technology office, Gym Center and Book Center) voted by three individuals I, II, III as follows: II III Technology Office 190 -40 -75 Gym Center -30 140 -40 Book Center -110 -70 300 (20 pts) Suppose that a society consists of three groups (A, B, C) choosing among four alternatives produce the consequences x, y, z and w. The utilities in the four cases are given as follows: Individual Utilities: X Y Z W A 10 9 2 1 B 5 9 7 6 C 4 3 11 5 What is the alternative that wins with the majority voting? What is the alternative that wins with the Borda method? What is the alternative that maximizes an utilitarian social welfare function? What is the alternative that maximizes Rawlsian function?