of End Chapter 4 Questions and Answers 1. What is meant by a "factor of production"? Name four categories or types of productive factors. How does land differ from the other factors? Answer: All the necessary inputs required for production are called "factors of production". There are four such factors: 1) Labor: includes workers and managerial staff 2) Capital: buildings, plant and equipment 3) Raw materials: necessary material inputs (including energy) which are processed to produce the required output 4) Land: required to construct buildings where machinery will be installed Land is fixed in location, even in the long run as it cannot be taken away from where it is. All the other factors are mobile. 2. Explain the "residual theory" of land value. Why is land value only the residual after other factors have been paid? Answer: In dividing up the value of the finished product among the four general factors of production, the defining characteristic of land that differentiates it from the other three factors is that land is fixed in location, even in the long run. You can never take land away to some other site where it might be able to earn more rent. The three more mobile factors (labor, raw material and capital) have to get paid first, in order to keep them from "running away" if they don't get paid an amount equal to what they could earn elsewhere, something the land cannot do. The gross value of the production on the site, measured by the total revenue earned by the clothing factory, will therefore go first to the mobile inputs. Only what is left over, after the mobile factors have been paid the necessary prevailing market costs, will there be anything available to the landowner in the form of rent. This is known as the "Residual Theory of Land Value". 3. What is the "bid-rent" curve and what is the relationship between the bid-rent and transportation costs? Answer: The "bid-rent" is the maximum rent that a potential user would "bid", or be willing to pay, for a site or location. This bid-rent produces the "residual value" calculated over distance. A bid-rent function is depicted on a graph with the vertical axis located at the "central point" and the horizontal axis representing distance from that point. Land uses that are more productive will have higher bid-rents at the central point. As you move away from the central point the bid-rent falls as the transportation costs rise due to the less central location. Land uses that are more sensitive to transport costs will have bid-rent curves with steeper slopes, i.e. bid rents falling more quickly with distance from the central point.
4. Suppose the most productive use of a particular site is as a high-volume, upscale restaurant which can generate revenues of $600,000 per year. The operating expenses, including labor, food, utilities (everything except rent) are $450,000 per year. The building can be built and equipped for $1 million, which can be paid and maintained for by a perpetual loan with interest of $100,000 per year. According to the residual theory, how much is the land parcel worth in rent? Answer: Revenue = $600,000 Total mobile-factor Costs = $450,000 + $100,000 = $ 550,000 Residual value = $50,000 Hence the parcel of land is worth $50,000 in annual rent 5. Why are denser or more intensive land uses typically found closer to central locations? Answer: Commercial property tends to be located at the central location. Each worker commutes to the central location to work and produce. As the transportation cost is minimum for those living near the central location, people prefer to live close by, thus increasing the density of population. 6. Describe the two possible effects of population growth on both relative and absolute land values within a monocentric homogeneous city. Answer: We consider the effects in two scenarios, one where the urban-sprawl is possible (exhibit-4-4) and second, where area is constant (sprawl is not possible, exhibit 4-5) We consider that the density of the city will remain constant, thus the area of the city shall have to increase to accommodate the increased population. The housing rent at the periphery must equal to construction cost rent plus the agricultural rent. The rent gradient shall remain same as before and hence as we move in the rent increases uniformly at the rate of transportation mile. per Thus as population increases, holding density and other prices constant, rents must increase in all parts of the city. Considering the area of the city is constant, thus the radius is fixed and the population growing, the inhabitants per acre in the city must increase. The rent gradient in equilibrium must equal the difference in transportation cost per mile, per acre. We are holding the transportation cost per person constant, but with more persons living per acre, the total transportation costs per acre must increase. So the rent gradient would increase. The rent at the urban boundary would still be the same, but rent everywhere else would increase due to the increased location premium. 7. How does productivity growth influence land value? Answer: Increases in productivity lead to increases in rents at all locations. The bid rent curve increases equally at all locations so we see a parallel shift upward for the given land use that shows more productivity. This new land use can afford more at all locations and therefore will be able to bid more at all locations.
8. What is meant by the term "edge city" versus "bedroom community"? Answer: The peripheral areas of major cites gained in importance and were virtually performing all major functions of the city, including major retail, office and industrial activities. The term "edge city" was coined by Joel Garreau to point out this phenomenon. There are three primary causes explaining the development of "edge cities": 1) Transport technology and Infrastructure developments: The development and constant improvement of automobile and roadway infrastructure provided a key condition necessary for the vast expansion of urban areas and the relative rise of edge locations. Centrally located railroad stations were replaced by more peripherally located airports as major terminals of intercity travel. The development of interstate highway network made freight traffic on roads more viable than railroads. 2) Retail threshold market size and Rising per capita incomes: The consumption per household increased with increase in per capita income. The increased market size made it viable for shopping centers to open at new locations. To reduce transportation costs of consumers and to avoid competition with existing centers in CBD, the new shopping centers opened up in sub-urban areas. Thus the CBD lost its monopoly on major retail functions of the metropolitan area. 3) Political and Social Factors: American suburbs were typically governed by numerous local political jurisdictions, each different from the central city municipality at the core. Tax burdens and the quality of local government services such as schools and crime prevention vary widely within metropolitan areas, typically to the disadvantage of central cities. This further stimulates outmigration by those who can afford it. 9. What does the monocentric city model say about the relative level of rents in two cities that are otherwise identical except that one city is located on a coastline and so cannot expand around all points of the compass? Answer: For a given population and density, the radius of the city must be greater if the city cannot avail itself of an entire 360-degree arc. The distance from the periphery of the coastal city is much more and hence the transportation rent associated with it is also much higher. Thus the central point or CBD or the coastal city will have higher rents in the monocentric city model. 10. Discuss the effect of land use boundaries on bid-rents and land values? Give an example of two land uses with negative locational externalities to at least one of the uses when they are adjacent to one another. Answer: As a result of land boundary effects location rents will be depressed near to a land boundary, at least in the case of one of the land uses (the one that is unfavorably affected). While location rent may be depressed by location near the boundary, location
value may in some cases actually be increased, if the neighborhood is growing, as sites adjacent to the existing commercial center, for example, may offer the prospect of conversion from residential to more valuable commercial use. Heavy industrial zones, air or noise pollution generators such as airports, or large commercial centers which generate high traffic volumes, are generally not compatible with most types of residential land use.