(Lobbying as an auction) A government can pursue three policies, x, y, and z. The monetary values… 1 answer below »

(Lobbying as an auction) A government can pursue three policies, x, y, and z. The monetary values attached to these policies by two interest groups, A and B, are given in Figure 89.1. The government chooses a policy in response to the payments the interest groups make to it. Consider the following two mechanisms. First-price auction Each interest group chooses a policy and an amount of money it is willing to pay. The government chooses the policy proposed by the group willing to pay the most. This group makes its payment to the government, and the losing group makes no payment. Menu auction Each interest group states, for each policy, the amount it is willing to pay to have the government implement that policy. The government chooses the policy for which the sum of the payments the groups are willing to make is the highest, and each group pays the government the amount of money it is willing to pay for that policy. In each case each interest group’s payoff is the value it attaches to the policy implemented minus the payment it makes. Assume that a tie is broken by the government’s choosing the policy, among those tied, whose name is first in the alphabet.