{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Answers June 08 complete - Answers June 2008 Question 1 a...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Answers June 2008 Question 1 a) Each of the following points is worth ½ a mark, except for the diagrams which are worth 1 mark each, for a total of 8 marks: A brief description of the physical layout of the City. No factor substitution for all firms. No consumer substitution for all residents. ZEP of manufacturing firms determines the position of their bid rent curve. Freight costs determine the slope of manufacturing bid rent curve. ZEP of housing firms determines the position of their bid rent curve. Housing price function determines the slope of the residential bid rent curve. Equilibrium requires land to be rented to the highest bidder. Equilibrium requires labour supplied to equal labour demanded. Open-city model assumption – the city is one of many in a nation, to which any of the residents may costlessly move to obtain the exogenous level of utility. Land market diagram showing the bid rent curves with proper labels. (1) City map indicating the distribution of land and land use boundaries consistent with the land market diagram. (1) Labour market showing supply, demand, and equilibrium wage and population. (1) b) The business bid rent function is derived from the zero economic profit condition: total revenue = total cost. Total revenue per firm is the firm’s output (200 bicycles / month) times the exogenous output price ($190) = $38,000. Total cost is the sum of capital cost ($1000), labour cost (10w), freight cost ($10 times 200x) and land cost L times R b (all per month). Given that L = 1 hectare, the zero-economic profit condition can be rearranged to give us R b as a function of x and w: R b = 37,000 – 2,000x – 10w. The BRF is linear in x since there is no factor substitution. For every mile that a firm relocates away from the port, freight cost increases by $10 times 200 = $2000. To maintain zero economic profit, land rent must decrease by that same $2000. (4 marks) c) x 1 (w) = 24 – w/100. This is obtained by equating R b and R r as must be the case at the business / residential boundary x 1 . (3 marks) d) x 2 (w) = –8 + w/100 This is obtained by equating R r and R a as must be the case at the residential / agricultural boundary. (3 marks)
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
e) Parts (c) and (d) give us two equations in x 1 , x 2 , and w. A third equation can be obtained from the density relationships given in the question. We are told that each manufacturing firm has one hectare as its land input and 10 workers. Thus employment density is 10 workers per hectare. We are also told that each housing firm has 2 hectares as its land input, and also that its 10,000 sq. ft. output is divided among ten households, each renting 1000 sq. ft.; thus there are 10 households on every 2 hectares of land, so residential density is 5 households per hectare. Given that employment density is two times the residential density, we know that the general equilibrium residential land area must be two times the business land area. Since the north-south dimension is common to both business and residential land areas, it would then follow that the residential area’s east- west dimension is two times the business area’s east-west dimension.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern