Effect of the bike-path amenity on consumer utility

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Reference no: EM131789105

Question: Joe is graduating from college and is currently faced with a decision of choosing between two competing job offers for the same position from equally reputable companies. The jobs are in two different cities A and B. If he chooses the job in City A then Joe's monthly salary will be $10,000 while the company is City B is offering him a monthly salary of $12,500. Joe looks for the best available rental apartment options in each city (he is not planning to buy a house). For renting similar one-bedroom apartments at a walking distance from his work place, Joe will have to pay a monthly rent of $6,000 in City A and $5,000 in City B. Though the cities are very similar in almost all crucial characteristics, there is one main difference. City A is designed to be a bike-friendly city, while City B has no such facilities like bike-paths and bike-racks that are easily available in City A. [Note: For this example let us ignore the pollution-reducing effects of being bike-friendly. Also, Joe walks to work and hence transport for work is not important to this discussion. We will care only about the pleasure and convenience of biking as a leisure activity.]

Using lessons from the Roback Model, can you comment on the effect of the "bike-path" amenity on consumer utility? Can you intuitively justify why utility is likely to behave in such a manner with respect to the "bike-path" amenity described here?

Using lessons from the Roback Model, can you comment on the effect of the "bike-path" amenity on firm costs? Can you intuitively justify why a firm's production costs are likely to behave in such a manner with respect to the "bike-path" amenity described here?

Reference no: EM131789105

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