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    In Metro, there are three types of houses: E (expensive), M (medium), and C (cheap). A recent survey suggest that there are three types of preferences for fire protection: H (high), I (intermediate), and L (low). Mr Wizard, an economic consultant to the city, recently made the following statement: "If my assumptions are correct , the shopping and sorting from the Tiebout process will generate three municipalities"

    a). Assume that Mr. Wizard's reasoning is correct. What are his assumptions?
    b). Suppose that the equilibrium number of municipalities turn out to be nine, not three. Where did Mr. Wizard go wrong? What set of assumptions would have given him the correction prediction?

    © BrainMass Inc. brainmass.com October 3, 2022, 1:35 am ad1c9bdddf
    https://brainmass.com/economics/preferences-choice/three-types-houses-398134

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    an economic consultant to the city, recently made the following statement:
    In Metro, there are three types of houses: E (expensive), M (medium), and C (cheap). A recent survey suggest that there are three types of preferences for fire protection: H (high), I (intermediate), and L (low). Mr Wizard, an economic consultant to the city, recently made the following statement: "If my assumptions are correct , the shopping and sorting from the Tiebout process will generate three municipalities"

    a). Assume that Mr. Wizard's reasoning is correct. What are his assumptions?
    If Mr. Wizard's reasoning is correct, then his assumption is that all the owners of one type of house will have one type of preference for fire protection. For example, all the owners of expensive houses may have a high preference for fire protection.
    b). Suppose that the equilibrium number of municipalities turn out to be nine, not three. Where did Mr. Wizard go wrong? What set of assumptions would have given him the correction prediction?
    Mr. Wizard went wrong in assuming that all the owners of one type of houses had the same preference for fire protection. On the other hand the reality is that owners of each of the three types of houses had preferences for each type of fire protection. Specifically this means that some owners of type E houses had preferences for high fire protection, some other owners of type E houses had intermediate preference for fire protection and the remaining owners of type E houses had low preferences for fire protection. This was true also of the owners of M and C type of houses.
    Had Mr. Wizard assumed that each of the type of house owners namely E, M and C had preferences for high, intermediate, and low fire protection then Mr. Wizard would have made the correct prediction.
    References:
    web.utk.edu/~wrobinso/540_lec_assume.html
    www.icme-organisers.dk/tsg14/TSG14-05.pdf
    academicaffairs.ucsd.edu/aps/.../Article_Research_on_Bias_Assumptions.pdf

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com October 3, 2022, 1:35 am ad1c9bdddf>
    https://brainmass.com/economics/preferences-choice/three-types-houses-398134

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