ECON 5822: Urban and Regional Economics



ECON 5822: Urban and Regional Economics

Study Guide for Midterm

Major Topics:

1) Five Axioms

a. Mobility affects prices

b. Self-reinforcing effects

c. Externalities cause inefficiencies

d. Production exhibits economies of scale

e. Competition affects economic profit.

2) Why Cities Exist

a. Comparative Advantage

b. Market Areas

c. Economies of Scale

d. Principle of Median Location

3) Growth and Development of Cities

a. Agglomeration Economies (Localization/Urbanization Economies)

- Sharing Intermediate Inputs

- Labor Market Pooling

- Knowledge Spillovers

1. Gerald Carlino article

- Retail Agglomeration

- Demand for Natural Amenities

4) City Size

a. Population Utility Curve

- What determines shape

- How it determines migration between cities

b. Multiplier Effect

- Relationship with marginal propensity to consume

c. Rank-Size Rule

- What the size of the exponent indicates in terms of distribution

5) Determinants of Growth

a. Human Capital, Physical Capital, Technology

b. Labor Demand and Labor Supply

- Elasticity of Labor Supply/demand

- How changes in labor demand or labor supply affect wages and population

c. Policies to influence growth and their effectiveness

- Edward Glaeser Article

6) Land-Rent

a. Ricardo’s Theory of Rent

b. Determinants of rents for agriculture, manufacturing, office firms, residential

c. Monocentric City

- Typical bid-rent functions of monocentric city

Practice Problems

Note: The test will consist of approximately 20 multiple choice questions and 9 short answer questions. The practice problems are just a sample of the types of questions you’ll be asked on the exam, and it is not intended to be exhaustive. You should also use the assignment, book, lecture notes, articles, and each other (not necessarily in that order) as a study tools.

1. Assume a factory produces and sells shoes at $11/shoe, whereas it costs approximately $20 for an individual to produce an shoe at home. If the population is uniformly distributed, and the costs of the traveling to the shoe factory are $0.50/round trip mile, how large is the market area of the shoe factory? Illustrate with a graph.

2. Explain why per capita income levels are significantly lower in landlocked nations compared to nations that have a coastline.

3. Suppose a firm that has uniform transport costs sees the following distribution of customers in 3 different areas, A to C. The distance between one endpoint and the other is 30 miles. Area C is 15 miles from each end. In which region will the firm locate? Briefly explain why the firm will choose that region.

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4. Consider a city with two auto sellers, a Toyota dealer and a Honda dealer. Initially, the distance between the two sellers is three miles. The Toyota dealer wants to relocate to a site adjacent to the Honda dealer and submits a rezoning request to the city council. The Honda dealer responds to the rezoning request with the following statement: “One of the lessons from Econ 101 is that an increase in supply will decrease price. If the Toyota dealer moves to the site adjacent to my dealership, the local supply of cars will increase and I’ll have to cut my prices to sell the same quantity of cars.” Critically appraise the Honda dealer’s statement. If the statement is incorrect, what’s wrong with the reasoning?

5. Assume a traveling carnival hires local workers in each city that it visits. The demand for carnival activities is uncertain, with a low or high demand equally likely in any given city. The owner of the carnival always hires the same quantity of labor in small cities (20 workers) but different quantities in big cities (varying between 10 workers with low demand and 30 workers with high demand). She always pays the same wage to workers in large cities ($9), but different wages in small cities (either $6 with low demand or $12 with high demand).

In which type of city does the carnival have a higher expected profit? Assume that the demand curves for labor are linear and parallel, with vertical intercepts of $18 with high demand and $12 with low demand.

6. Explain the difference between the Jacobs and the Marshall-Arrow-Romer view (MAR) of knowledge spillovers

7. Explain what economic studies have found regarding the relationship between employment density, population, and levels of innovation in cities.

8. What would you expect the sign of the elasticity of per capita income with respect to cities’ population density to be? Explain why.

9. Suppose the elasticity of elasticity of per capita income with respect to cities’ population density equals +0.05. What does this suggest would happen if there is a 12% decrease in the population density of a city?

10. Consider a region with 6 million workers and two cities (A and B), each with an initial workforce of 3 million (the utility maximizing workforce). Suppose the heli-segway (a flying personal transporter) replaces the automobile, cutting commuting costs and increasing the utility maximizing urban workforce per city to 5 million. The positively sloped part of the new utility curve is steeper than the negatively sloped part.

a. Show the effect of the heli-segway on the urban utility curve in the typical city.

b. A workforce of 3 million [is, isn’t] a stable equilibrium because…

c. Using the new utility curves, show the changes in the workforces of two cities, one that grows and one that shrinks. Label the initial point i and indicate the directions of the changes with arrows.

11.

a) Consider a city that has a population of 100,000 residents. If the largest city in this nation has 4,000,000 residents, and the “rank size rule” holds true, what is the rank of this city in terms of the distribution of population?

b) If the 8th ranked city in this nation has a population of 1,000,000, what does this mean in terms of the value of “b”? Is the population more or less evenly distributed in this country than would be predicted by the rank-size rule?

12. Explain why larger cities have larger export employment multipliers compared to smaller cities.

13. Consider the effects of a natural disaster like hurricane Katrina on a metropolitan economy. In the initial equilibrium, total employment in the metropolitan area is 500,000 workers and the daily wage is $100. The price elasticity of supply of labor is 4.0 and the price elasticity of demand for labor is -1.0. Suppose the hurricane reduces labor supply (a horizontal shift of the supply curve) by 100,000 workers.

a. Use a supply-demand graph of the urban labor market to show the effects of the hurricane.

b. The equilibrium wage [increases or decreases] by ____ percent (to $______)?

c. The equilibrium employment [increases or decreases] by ____ percent (to _______)?

14. Explain how the large decline in transport costs over the past 100 years has contributed a net migration in the U.S. away from the Northeast and Midwest, and toward the West and South.

15. Explain how wages and housing costs differ between growing cities and shrinking cities. What explains the difference and what does this mean for real wages?

16. Explain the difference between supply-oriented economic growth policies and demand oriented economic growth policies. Which has been shown to be more effective in terms of population growth over time?

17. Explain why new professional sports franchises in cities have been shown to have very minor employment effects within cities.

18. Explain what determines the shape of bid-rent functions within cities.

19*. The basic monocentric city model has ___________ in the city center, followed by ___________, followed by ___________, followed by ___________.

20*. Graph the shape of bid-rent functions of households on the same set of axes for the following 3 cities:

a. City A has low crime in the city center and high commute costs to the city center.

b. City B has high crime in the city center and low commute costs to the city center.

c. City C has high crime in the city center and high commute costs to the city center.

*Note: I’m not sure how far we’ll get into bid-rent material on Tuesday. If we don’t get to this material you won’t be asked about it on the exam.

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A B C D

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