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BUSI 300 Answer Guide No. 3 CHAPTER 4: Urban Development 1.Answer: (2) First, scale economies cause firms to cluster in space. Competition for accessible locations creates differences in land prices that give rise to differences in population density. Companies such as specialty vegan stores develop last because these specialty stores will only form once the city is big enough to support them. 2.Answer: (4) If a firm locates with many other firms, it will be able to purchase specialized inputs more cheaply than it can produce them internally; it will have access to a pool of skilled labour that is not available elsewhere; and it may acquire valuable information from other firms. Incurring lower transportation cost because of locating within a group is also a benefit associated with the clustering of firms. 3.Answer: (2) Because the external scale economy is mostly determined by the size of the firm’s industry at a particular location, it is a localization economy. When there are localization economies, firms will be more productive when there are many other related firms at the same location. In this case, it is the size of the industry, not the size of the city, that matters.