Chapter 6 notes - Urban Land Markets: Notes on Chap. 6 of...

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Urban Land Markets: Notes on Chap. 6 of O’Sullivan Urban Economics Text 1. Land-Market Equilibrium: Office Bid Rent with Factor Substitution In what follows here, we will elaborate on the analysis of land-market equilibrium with factor substitution, as outlined in the text. Starting with a model in the text, the key objective in this section is to derive the model’s endogenous variables (examples include land rent at each location, building height at each location) from the exogenous variables (examples include revenue received by office firms and “travel cost” – a variable capturing the additional cost faced by firms operating at a distance from the median location 1 ). Before reading on, it is suggested that students read pages 104-112 and 127- 129 in the text (6 th edition (2007) – earlier editions should not be used). Those pages should be kept handy since they will be referred to frequently. In what follows here, hyphenated numbers for tables or figures (for example Table 6-7) refer to tables or diagrams in the text. Table or figure numbers without a hyphen (for example Table 1) refer to tables or diagrams included in these notes (the diagrams in these notes appear at the end). We begin with Table 6-7 on page 111 of the text. We will re-order the table so that exogenous variables (given from outside the model) are grouped in columns 1-4; the endogenous variables (determined in the model) will be grouped in columns 5-9. The resulting table appears here as Table 1. Table 1 also includes values for variables on rows omitted in Table 6-7: the rows added here show all data for locations at 0, 4 and 6 blocks from the median location, while travel cost numbers have been added for locations at 2 and 3 blocks. The blank spaces for variables at 2 and 3 blocks are not filled in since the omitted data will not be needed in the discussion below. 1 It is at the median location – that is, at the centre of the office market – that information services such as legal or financial advice are assumed to be provided at lowest cost. However, firms at less central locations can remain competitive because land rent will adjust as required to keep them competitive. This is the key point made in the text pages cited above and in these notes.
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Table 1: Expanded / Re-ordered Version of Table 6-7 in Text 1. Distance in blocks ( x ) 2. Travel cost / day 3. Total revenue / day 4. Other non-land cost /day 5. Product’n site (hectares) 6. Bldg. height (floors) 7. Total rent paid /day 8. Capital cost of bldg./day 9. Bid rent per ha / day 0 $0 $500 $150 0.02 50 $70 $280 $3500 1 $36 $500 $150 0.04 25 $64 $250 $1600 2 $74 $500 $150 3 $114 $500 $150 4 $156 $500 $150 0.125 8 $54 $140 $432 5 $200 $500 $150 0.25 4 $50 $100 $200 6 $246 $500 $150 0.50 2 $29 $75 $58 The numbers in Table 1 could be interpreted as applying to seven firms, operating at seven different locations as indicated in Column 1. Alternatively, we could interpret Table 1 as applying to a single firm that moves from one location
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This note was uploaded on 07/18/2010 for the course LIFE SCIEN eco333 taught by Professor Peterson during the Summer '10 term at University of Toronto.

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Chapter 6 notes - Urban Land Markets: Notes on Chap. 6 of...

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