Question

17) Individual A, B and C get the following payoffs off 3 projects: (payoff A, payoff B, payoff C) project #1: (100, 90, 70) project #2: (75, 110, 90) project #3: (80, 80, 95) Suppose that each individual has a vote in a majority-rule decision-making environment. There is no restriction on how many times the voting can take place. Without the availability of transfers, the outcome would be ______? With the availability of transfers, the outcome would be _______?

a) project #3; project #2

b) project #1; indeterminate

c) indeterminate; indeterminate

d) indeterminate; project #2

e) project #1; project #3

Answer 1

A)

i) 100 > 80 > 75 => P1 > P3 > P2

ii) 110 > 90 > 80 => P2 > P1 > P3

iii) 95 > 90 > 70 => P3 > P2 > P1

Either one of the project is desired by one or the other agent. The rule of majority fails to hold in this case. Thus, the solution becomes indeterminate.

B)

The gross payoffs from project 2 are 110 + 75 + 90 = 275.

This payoff is the highest amongst all the three projects. Therefore, every agent can be made better off by permitting transfers.

Thus, the 2nd project is chosen.

The correct answer is thus, option d. indeterminate; project #2.