1) (Gruber 12) Epple and Romano (2002) describe theoretical evidence that school vouchers will lead to cream

-skimming, where private schools will pick off the better students and leave public schools with lower -ability average students. They propose targeted vouchers, in which different sized vouchers go to different groups of students, to combat this potential concern. How would you design a targeted voucher system that would lead to a reduced level of cream -skimming?

2) 4) Consider three types of families, A, B and C. They live in a very large city where private schools come in all different levels of quality E. The cost per unit of quality is p = $10. Families split their income between paying for a school of quality E and all other consumption spending X, giving family utility UA = log(X) + log(E), UB = 0.75 log(X) +0.25 log(E) and UC = X+ E. All families have the same income W=100. a) What quality of education will each type of family purchase? b) The city has decided to offer a public school option which provides Ep= 2 units of quality at no charge. Students may choose to enroll in private schools as before, or they may choose to forgo private education and accept the public option. How much education quality will each type of family obtain? Will this intervention increase every students education quality? c) Suppose that instead of offering a public school option, the government of this city simply gave each student a voucher worth 2 units of education quality. How much education quality will each family purchase? Does this intervention crowd out the families private education spending?