Assignment: 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"
1. Assume that Mr. Wizard's reasoning is correct. What are his assumptions?
2. 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?