1) Reproduce the book title exactly as it appears in the book itself (or a publisher's listing of the book). Looking up this book online, it appears to be: How the Aid Industry Works: An Introduction to International Development 2) Usually, the title of the book would be italicized. 3) There are no universal rules for the formatting academic citations. If you were going to submit it to a journal for publication, the journal's "Instructions for Authors" would tell you what style to follow. For example, "PLOS has adopted a standard reference style, NLM/ICMJE. Please ensure your reference list is properly formatted to this style guide." In a college or university, you should ask your instructor what style guide to follow. If it's not very important, choose a journal or a textbook in the same field your paper is in and imitate the citation style they use.

I worked as an editor for different journals, and Dan's answer is the most accurate and correct. It depends on the style that you're using. There is generally a particular style that is followed for each field (e.g., health care, engineering, etc.). As well, each journal will follow one particular style or could even have its own style. This style will dictate whether the title is in title case or not, whether it is italicized, etc. In your examples above and without knowing what particular style you're following, 1 is more accurate, and 2 would not be used, as you would never use title case on the first part of the book's title but not the second part.

You should ALWAYS capitalize the title of a book unless, as Jerry says, it is specifically not capitalized on the actual book cover or title page.

You are to replicate the title exactly as it appears on the book.

you should capatilize it