Reference no: EM132238604

Question 1 -

Indicate if the following statements are TRUE OR FALSE? NO EXPLANATION is required.

1) The availability of cheap electricity in a big city is an example of pecuniary agglomeration economics.

2) If the production process is weight-losing, transport-cost minimization suggests that the best location for a factory is the market.

3) As per the monocentric city model, an increase in telecommuting (workers working from home rather than commuting to job sites) means that workers spend less income at commuting to work, which results in cities being more spread out.

4) In a shopping center, strong inter-store externalities prevent the shopping mall owner from charging high store rents since high competition is reducing store profits.

5) According to the monocentric city model, suburban housing developers make lower profits since demand of housing and, hence, price of housing is lower in the suburbs.

6) Wage gradient means that dispersed worksites away from CBD, will need to put higher salaries to workers to encourage them to work there, since they are located far away from the city center.

7) The spatial variation in urban amenities affects housing location-choice decisions across various income groups with the rich choosing to live in locations with more attractive amenities.

8) The urban model incorporating the Harris-Todaro model concludes that in response to high unemployment in cities of developing countries, a policy that increases the availability of jobs in the city might in fact resulted in an increased unemployment rate in that city.

9) Along a freeway catchment area, housing prices and, hence, land rent falls more faster resulting in the city being spatially elongated across the catchment region.

Question 2 -

A large technology Company decides to create a entrepreneurship friendly space, where small enterprises can operate in close proximity to one another. To create this space, which will be called Zone Forty-Two, the Company will construct office space, which will be rented to tenants for free. The Company is considering two start-up firms, B Enterprises (a business software producer) and M Enterprises (a medical software producer). Both firms are currently located in different small towns of California; where they work out of their homes hence pay no rent.

The sales volume for a firm if it locates at Zone Forty-Two depends on whether other firm is also present. These sales volumes, along with the firms' sales at their current home locations, are presented in Table 1.

Table 1	Sales Volume at
	Home-Town location	Zone Forty-two (alone)	Zone Forty-Two (with other firm)
B Enterprises	$400	$400	$440
M Enterprises	$450	$450	$500

(a) Give an intuitive explanation why the sales figures are in the last column of Table 1 differ from the first two columns of the table. Hint: Elaborate on different types of economics that are likely to the first two columns of the table. Hint: Elaborate on different types of economics that are likely to benefit firms locating next to each other in Zone Forty-Two.

To decide where to locate, firms compute their profits in the different locations. Profit equals sales minus labor cost. A problem is that labor costs for both firms are higher at Zone Forty-Two than in their home-towns, are listed in Table 2.

Table 2	Labor Cost at
	Home-town locations	Zone-Forty-Two
B Enterprises	$250	$260
M Enterprises	$250	$270

(b) Calculate the profits for each firm under the various location-condition combinations as represented in the following table (copy the table to your blue-book and show your work);

	Profits at
	Home-Town locations	Zone Forty-Two (alone)	Zone Forty-Two (with other firm)
B Enterprises
M Enterprises

Using data from the table on profits that you just constructed, answer the remaining questions.

(c) The Company invites the prospective tenants to apply for space at Zone Forty-Two not knowing who else will occupy the park; each firm assumes the worst that is it will end up alone at Zone Forty-Two. Under these circumstances, which firms (if any) will apply for a site? Use the calculations made in (b) above to support and explain you answer.

(d) Suppose now that the Company guarantees each firm that if it occupies the park, the other firms will surely be there. In other words, B Enterprises is told that if it chooses to locate at Zone Forty-Two, it is certain to find M Enterprises at its neighbor, and vice' versa. Assume that the prospective tenants believe this guarantee is fully credible. In this case, would they apply for sites at Zone Forty-Two? Use the calculations made in (b) above to support and explain your answer.

(e) Suppose the firms' managers are doubtful about the Company's promise of full occupancy of Zone Forty-Two. The Company then seeks some other approach, and agrees to allocate $20 (in total) towards Zone Forty-Two. At first this seems like a trivial amount of money, but the Company's Financial Officer figures out that if the money is cleverly used in the form of a start-up grant, then they might be able to achieve full occupancy of Zone Forty-Two. Can you see how to achieve this end? If so, explain exactly how the money should be used.

In the U.S., roads are subsidized in the sense that gas taxes and other user charges don't cover the cost of road building and maintenance. To eliminate this road subsidy, the gas tax per gallon would have to rise, so that the cost per mile of commuting (t) would go up.

(a) From your basic model, what would be the effect of this change (a rise in t) on a city's radius x? Provide a detailed explanation describing how and why this change impacts consumers' and housing-developers' decisions and the effect of these decisions on city size. Draw a graph showing the determination of the city's boundary (x) to support your explanation.

(b) Urban analysts often criticize this sort road subsidization policy as resulting in highly spread-out, scattered cities cutting it urban sprawl. Based on your analysis in part (a), would you conclude   that road subsidies contribute to urban sprawl? Explain how.

This is not the end of the story, however, since the new revenue from a higher gas tax would allow income taxes that currently support road spending to be reduced. In the urban model, lower income taxes can be represented as an increase in consumer income (y). Think of y as representing after-tax income. So, the higher t from the higher gas tax would go along with a higher y.

(c) For this part, carry out the analysis ignoring the effect of a higher tend focus only on a higher y. from your basic model, what would be the effect of the higher y on the city's radius x? Provide a detailed explanation describing how and why this change impacts consumers' and housing-developers' decisions and the effect of these decisions on city size. Draw a graph showing the determination of the city's boundary (x) to support your explanation.

(d) If you consider both these effects (from parts (a) and (c)) simultaneously, can you tell how (x) would be affected by combination of a higher t and higher y? If not, can you offer a guess if the city would expand or shrink? And why?