SECTION B: ESSAY TYPE QUESTIONS (10 points each) To be completed in the script book. QUESTION 11 In a transferable voting system each voter provides a ranking of the candidates. The candidate with the lowest number of first-choice votes is eliminated, and the votes are transferred to the second-choice candidates. This process proceeds until a candidate achieves a majority. (a) Assume sincere voting, (1) Explain what is meant by Condorcet winner and show, by means of an example different from those covered in class, that the transferable voting system may fail to select the Condorcet winner when one exists. (2 points) (11) Explain what is meant by independence of irrelevant alternatives and show, by means of an example different from those covered in class, that the transferable voting system fails independence of irrelevant alternatives. (3 points) (111)Explain what 1s meant by positive responsiveness and show, by means of an example different from those covered in class, that the transferable voting system fails positive responsiveness. (3 points) (b) Show how strategic voting can affect the outcome obtained in (a)(1). (2 points) QUESTION 12 (a) A town has three families, each with one child, and each of which earns $ 100000 per year (pre-tax). Each family is taxed $10000 per year to finance the public school system in the town, which any family can then freely attend. Education spending is $15000 per student in the public schools. The three families differ in their preferences for education. Though families 4 and B both send their children to the public school, family B places a greater value on education than family 4. Family C places the greatest relative value on education and sends its child to private school. Graph the budget constraint, making sure all relevant points are correctly labeled, and draw a possible indifference curve that corresponds to the choice each family makes, providing a brief explanation. (3 points) (b) The town 1s considering replacing its current system with a voucher system. Under the new system, each family would receive a $15000 voucher for education to use in either public or private schools. The voucher system is more costly and taxes need to increase to $15000 per household to pay for it. Suppose that, when the new system is introduced, family A4 continues to send their child to public school, but family B now sends their child to private school (along with family C's child). (1) Explain how you know that family C 1s made better off and family 4 is made worse off by the voucher policy. Provide also a graphical illustration. (11) Show, using diagrams, that family B could be made better or worse off by the voucher policy. (7 points) QUESTION 13 (a) Explain the efficiency-equity trade-off of labour income taxes using as reference the differences between proportional and progressive linear income tax schedules. Support your explanation with a graphical illustration. (4 points) (b) Explain how nonlinear income tax structures may be able to increase the amount of redistribution without increasing the deadweight loss associated with the tax. Support your explanation with a graphical illustration. (3 points) (c) \"If there are groups in the population that differ in their labour supply elasticity, they should be taxed at different rates\". Justify this in terms of the theory of optimal taxation, and discuss its implications for the joint taxation of working spouses. (3 points) QUESTION 14 Two identical risk-neutral airlines have applied for the exclusive right to operate an airline route during the coming year. The marginal cost is $100 and the demand curve for its services is P=1000-Q, where P 1s the price per passenger and O is the expected number of passengers. The exclusive right to operate the airline route is assigned for only one year, and it allows the airline with the right to charge the monopoly price for the airline ticket. The airline awarded the right cannot price discriminate across different passengers. (a) If the government chooses the firm that spends the most money lobbying the government members and firms cannot collude, what is the equilibrium strategy for each firm? For that equilibrium strategy, what is the expected amount each firm will devote to lobbying? Provide a detailed explanation and a graphical illustration. (4 points) (b) Now suppose that a higher lobbying activity increases the probability of getting the rent but does not ensure a win. If firm 7 spends the amount x; on lobbying activity, it will get the franchise with probability p; = xi/(x;+x-;) where x-; stands for the lobbying activity of all other firms. How much will each firm spend on lobbying in a symmetric equilibrium? How much do all firms spend in total? Provide a detailed proof. (4 points) (c) Identify and discuss the differences in results between parts (a) and (b). (2 points)