# Econ148.Midterm.Comments.May9,10 - 1 Richard Arnott May 9,...

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Richard Arnott May 9, 2010 Economics 148 Land and Resource Economics Comments on Midterm General Most students displayed sound economic intuition and good common sense, but struggled when it came to formalizing that intuition in a logical economic argument and displayed weak general knowledge. I. Definitions An explanation is not a definition. A definition is one sentence and precise. “Optimal” implies maximizing something, and “size” needs to be clarified. Size typically means population size, and optimal means maximizing utility of minimizing costs. II. Short analytical questions 1. Let q be the output of a firm, n the number of workers it employs, and N the number of workers employed in that industry. The production function of a firm with external economies of scale is q = A(N)n, where dA/dN 0. Each firm takes A as fixed and hence views itself as facing constant returns to scale. But an increase in the number of workers in the industry causes each firm’s average product of labor curve to shift up. 2. In the absence of the property tax, it was shown in class and in notes that V = R/(r – g). In class, I argued that r and τ should enter the formula in the same way since a 1% increase in the property tax has the same effect on earnings as a 1% increase in the interest rate. Thus, with the property tax V = R/(r + τ - g). 3. A firm will choose to relocate to the suburbs if doing so will increase its profits. Wages, rents, product price (e.g., for a haircut or day care) and productivity may all vary over space. Suppose for the sake of argument that the good is an export good, with a fixed world price. Wages and rents will fall off with distance from the city center,

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## This note was uploaded on 10/05/2010 for the course ECON 148 taught by Professor Richardarnott during the Spring '10 term at UC Riverside.

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Econ148.Midterm.Comments.May9,10 - 1 Richard Arnott May 9,...

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